Comparative Analysis on Application of IFRS in different countries

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Table of Contents

Introduction: 3

Review of Literature: 3

Difference in utilization of IFRS in different countries: 3

Factors affecting international financial reporting practices: 5

Accounting and Economic Environment: 5

Accounting and Political Environment: 5

Accounting and Socio-Cultural Environment: 6

Accounting and Legal Environment: 6

Accounting and Internationalization of Capital Market: – 6

Accounting and Emergence of Multinational Corporations: 6

Accounting and Inflation: 6

Accounting and Professional Bodies: 7

Accounting and Conceptual Framework: 7

Accounting and Report Regime: 7

Accounting and Cross Border Terrorism: 8

Comparative financial reporting practices in selected countries: 8

Country wise difference in accounting policies 8

Inventory Valuation: 8

Pre-Operating Expenses: 9

Research question: 10

Methodology: 10

Reference: 11

Introduction:

International financial reporting in common parlance refers to a broader concept which include the development of numerous factors like whom to disclose, what to disclose, when much to disclose and finally how to disclose at international level (Kouki 2018). International financial reporting is commonly perceived not only to disclose financial information at world large but development of many factors which shapes and reshapes accounting rules, regulations, procedures and practices at international level (Abiodun and Asamu 2018). The main emphasis of international financial reporting lies on the establishment of effective accounting standards to enhance reliability, relevancy, consistency and creditability and moreover universality of accounting information at global level (Choi and Meek, 2008). The basic premise of international financial reporting practices at world large is depends on the following elements: –

• International financial reporting laid emphasis on fulfilling the specific need and nature of diverse accounting groups or user of accounting information at international level.
• International financial reporting lies on sound conceptual framework which plays a very important role in establishing a better position for accounting users and standard setter to access alternative accounting formats, methods and procedures.
• International financial reporting gives clues as well as solutions to problems like personal biasness and element of subjectivity which is prevailing in different countries in context to accounting practices.
• International financial reporting facilitates universality and harmonization of accounting practices at international level

Review of Literature:

Difference in utilization of IFRS in different countries:

Ahmad (2017) presumed that financial specialists and members in the universal capital market see bookkeeping assorted variety as a significant issue that influences the capital market choices. The paper finished up the two primary factors Firstly; contrasts in the bookkeeping practices may influence the security valuation and the creation of global portfolios. Besides, this paper portrayed as powerful methods for holding over bookkeeping decent variety and its effect on universal capital markets. Bautista et al. (2019) explored the diversity in the accounting practices and policies of France, Germany and United Kingdom. This paper concluded the various factors. Firstly, the paper has explored the significant differences between ratio analysis and financial market valuation in their financial reporting practices. Secondly, it also provides preliminary evidence on the effects of the (EU) European Union directives on accounting measurement differences as well as differences in reporting practices.

Ajibade et al. (2019) found that presence of decent variety in bookkeeping standards and bookkeeping framework has critical ramifications for the understanding of monetary detailing in worldwide field and, along these lines, for the choices which might be assumed the premise of the translation drawn from an examination of such bookkeeping data. The paper closed the two primary variables. Right off the bat, bookkeeping assorted variety can be considered as a prime hindrance for the universal equivalence of money related detailing. Furthermore, the paper has discovered the significant contrasts in the circumstance of organizations for example liquidity, dissolvability and productivity and so on under various bookkeeping standards. Guillaume and Pierre (2016), found that the effect of ecological factors on the advancement of bookkeeping approaches and detailing rehearses. Under their perception there were four ruling natural factors which are utilized to clarify the variety saw after some time in bookkeeping decent variety and improvement in setting to arrangements and announcing rehearses. These elements were the monetary condition, the world of politics, the improvement of the securities exchange, and privatization of state-claimed companies. The paper finished up the two fundamental elements. Initially, the effect of the natural factors on bookkeeping improvement changes after some time mirroring the various phases of vote-based system and financial change. Besides, it furnishes universal financial specialists and analysts with an inside and out comprehension of the ruling natural factors that influence bookkeeping rehearses in worldwide field.

Sanko and Koldovskyi (2017) found that the worldwide bookkeeping applied structure, norms revealing despite everything keep on speaking to a crucial preeminent universal bookkeeping bodies like (IASB) global bookkeeping standard board and (FASB) money related bookkeeping standard board, being a long way from the phase of down to earth usage. Both bookkeeping bodies are seeing the assorted variety and complexities in response to bookkeeping framework in worldwide field. Subsequently, orchestrating both national and global bookkeeping guidelines is essential so it would be as per organizations’ advantage.

Dolgikh (2017) witnessed the diversity between accounting systems of Continental-European type and Anglo-Saxon type respectively. The paper concluded many factors. Firstly, the paper examines the relevance of the criterion in the historic context and its impact on accounting policies and procedures. Secondly, it also studies the whole framework comprising economic, social, legal and political variables and their impact on financial reporting.

Cegar (2019) observed that the main factors for diversity in accounting practices, policies and procedures and to better understand how accounting differences have a huge impact on accounting harmonization. The paper concluded the two main factors. Firstly, it strengthens the awareness of the existence of the causes for accounting diversity at international level. It is important to understand the current complexities and difficulties of the drive towards international accounting harmonization. Secondly, it also highlighted the in-depth analysis of the environmental variables that are considered most influential in causing accounting diversity.

Factors affecting international financial reporting practices:

Accounting policies and practices prevailing in the nation are influenced by various environmental variables, but at the same time, it is one of the factors affecting on this same environment (Zori et al. 2017). This is a fact that points to the interdependency of accounting and its environment. In other words, A nation’s accounting policies practices and procedures is affected by complex interaction of economic, socio – cultural, political, legal and many other environmental factors, so it is next to impossible to say that environmental factors of two or more countries are going to be similar (Guillaume and Pierra 2016). Nation’s accounting principles and practices are the product of complex interaction of above environmental factors. It is unlikely that mix is identical in any two countries or more and therefore diversity is to be expected at global level (Abiodun and Asamu 2018). Some of the glorying factors which influence international financial reporting practices at world level are as follows:

Accounting and Economic Environment:

The level of economic development of the country is likely to influence the type of business entities or groups exist in a country (Kouki 2018). Developed countries like US and AUSTRALIA are more featured by large and complex organizations in comparison to developing countries like India, Pakistan and Sri Lanka. Financial recording and reporting practices will be sounder and complex in developed countries due to the presence of hefty number of multinational corporations.

Accounting and Political Environment:

The political environment and system prevailing in a particular country will have a greater impact on the accounting policies, procedures and reporting. The way a country is politically governed can have considerable influence on accounting system. The relevance of political system can also see in many countries that are effectively run by dictators (Dolgikh and Koldovskyi 2017). Countries like France and Netherlands still follow accounting system given by their colonial rulers. Likewise, countries like India, NZ, Australia and Hong Kong has adopted the accounting system of Britishers.

Accounting and Socio-Cultural Environment:

A major source of influence on accounting practices and procedures is socio-culture factor. Factors like secrecy v/s transparency, optimism v/s pessimism and uniformity v/s flexibility etc have a huge impact on the measurement of financial items as well as financial disclosure practices at world large (Vardar and Erkol 2019). Developed countries like US and AUSTRALIA are more transparent, optimistic and flexible than Japan, Germany, India and China etc. when it comes to disclosure of financial records due to socio-cultural factors.

Accounting and Legal Environment:

Legal environment is one of the most dominating factors for diversity in accounting practices in global arena. Different countries have their own legal structure and systems. Some countries are nationalistic and other is rationalistic. In other words, some countries possess strict legal system and other countries possess adaptive legal system (Ajibade et al. 2019). Countries like France and Germany follows code law which is more legalistic, detailed, prescriptive, procedural and nationalistic. On the contrary, countries like US, AUSTRALIA and NZ and Australia follows common law which is more flexible, adaptive and innovative in comparison to code law.

Accounting and Internationalization of Capital Market: –

The elements of capital market have an impact on accounting practices and procedures. Difference in financial system, emergence of new and innovative financial securities and impact of GAAR etc factors leads to diversity in accounting practices, procedures and disclosure requirements (Zori et al. 2017). In debt-oriented countries like Germany, Japan and Switzerland, financial reporting tends to be more Spartan against equity-oriented countries like US, Australia and India. The level of globalization of capital market or listing of securities at international level impacts financial recording and reporting practices to huge extent.

Accounting and Emergence of Multinational Corporations:

Developed countries tend to have capitalistic economy as well as possess large and complex organizations, where accounting problems are far more complex and detrimental than those of small organizations in developing and underdeveloped countries (Cegar 2019). In countries like US and AUSTRALIA, organizations are relatively large, complex and owned by large number of employees against developing countries like India, Pakistan and Sri Lanka. The extent of accounting principles and practices is likely to be maximum and complex in developed countries.

Accounting and Inflation:

An economy’s level of inflation can also be perceived as an influencing factor in the context of diversity in accounting practices, policies and procedures, because it has a direct impact on the asset valuation method. It is advisable to opt for appropriate accounting system which supports the inflationary conditions of a particular country when inflation rate is prevailing quite high (Abiodun and Asamu 2018). Countries like US and AUSTRALIA are familiar with historical cost model when it comes to their accounting practices. On the contrary, countries like Bolivia and Mexico do not have luxury of persisting with the practice of historical cost model. They use inflation adjusted models of financial reporting to provide more decision relevant information in context to their economies.

Accounting and Professional Bodies:

Number of accounting professional bodies has a direct link with the quality of accounting practices, policies and procedures that prevails in a particular country. The designing and standard of accounting system in a country is primarily depends upon the quality of professional bodies (Choi and Meek, 2008). Independent accounting professional bodies like (AASB) Australian accounting standard board, (AARF) Australian accounting research foundation, (ICAA) Institute of chartered accountants in Australia etc. has a huge impact on Australian accounting principles, practices and disclosure practices. At global level, (IASB) international accounting standard board of United Kingdom and financial accounting standard board of USA are providing conceptual framework to satisfy the needs and nature of diverse groups of accounting users at global level which facilitate the harmonization and universality of information at global level.

Accounting and Conceptual Framework:

Conceptual framework provides a logical and consistent guide to accounting standards that prevails in a particular country. While a conceptual framework does not have a compulsory status in every country, still it provides a reference point for developing and adopting accounting standards (Astuti and Sulistyowati 2017). Countries like US, AUSTRALIA, Canada and Australia etc have invented their own version of conceptual framework in accordance with their own environmental variables. On the contrary, developing countries like India, Pakistan and Sri Lanka have a habit to follow conceptual framework of other countries.

Accounting and Report Regime:

Type of report regime can also have a huge impact on the system of accounting as well as the financial reporting that prevails in a particular country (Guillaume and Pierre 2016). Countries like Austria and Germany who follow single set of rules i.e. same rules for financial as well as tax reporting looks rich in their report regime to potential investors but poor to tax authorities against countries like US, AUSTRALIA and India who use to follow double set of rules while reporting.

Accounting and Cross Border Terrorism:

Cross border terrorism is not a new phenomenon particularly for Asian countries. However, terrorist attack on 11 September, 2001 in US has made cross border terrorism an international issue. Developed country like US in particular is not only providing financial assistance to developing and under developed countries to fight against terrorism but also business and their own accounting system to carry out transactions in an efficient manner (Sanko and Koldovskyi 2017)

Comparative financial reporting practices in selected countries:

Comparative financial reporting practices in different countries implies the comparative as well as comprehensive reporting in consideration to different and complex accounting set of rules, regulations, procedures, principles and practices in different countries (Molchanova 2020). The basic premise of comparative financial reporting is to sort out the major differences as well as solutions to overcome such differences in order to provide universality in accounting at global level (Vardar and Erkol 2019). The scale of international financial reporting remains large, complex and diversified despite the adoption of international financial reporting standards (IFRS). In the light of the above problem, comparative analysis of financial reporting practices in India, US and AUSTRALIA in line with IFRS as well as which are rich in accounting profession and standards can be a handy tool to compare the differences in context to accounting aspects which arises due to the differences in environmental variables as well as to work out hard for similarity and harmonization of accounting recording and reporting practices.

Country wise difference in accounting policies

Inventory Valuation:

IFRS: –

Under IFRS, IAS-2 ‘inventories’ deals with the concept of inventories. In other words, the main source of accounting treatment of inventories is specifically mentioned under IAS-2. The value of inventory is measured on the basis of cost or net realizable value, whichever is less but in certain specific industry like financial industry, the value of inventory is determined on the basis of fair market value. Under IFRS, the most appropriate method for cost of inventory is FIFO and weighted average cost method. LIFO method which is one of the popular methods and used by many countries is strongly prohibited under IFRS. Specific identification inventory valuation method is allowed in case of specific projects.

Indian GAAP:

Under Indian GAAP, AS-2 ‘valuation of inventories’ deals with measurement as well as valuation of inventories. The valuation of inventory is measured on the basis of cost or net realizable value, whichever is less. Some of the popular methods of inventory valuation under Indian GAAP are FIFO, Weighted average, retail cost and standard cost method but overall Indian standards are consistent with IFRS when it comes to valuation and methods of inventory (Chantachaimongkol and Chen 2019.

US GAAP:

Under US GAAP, FASB accounting standard codification 330-10 deals with the meaning, measurement and methods of inventory valuation. This standard codification follows IAS-2 when it comes to measurement of inventory valuation i.e. cost or net realizable value, whichever is less but in case of methods of inventory valuation there is slight difference in the approach of US GAAP against IFRS. LIFO method is permitted for inventory valuation but the same was strongly prohibited under IFRS.

AUSTRALIA GAAP:

SSAP-9 ‘inventories and long-term contracts’ deals with inventory accounting and valuation of inventories. AUSTRALIA GAAP is in line with IFRS with regard to inventory valuation i.e. cost or net realizable value, whichever is less but when it comes to method of inventory valuation, FIFO and weighted average inventory methods are the suitable methods for inventory valuation.

Pre-Operating Expenses:

IFRS:

Under IFRS, paragraph 69 of IAS 38 deals with the accounting treatment of pre-operating expenses. IAS 38 state that pre operating expenses like cost of plant, property and equipment, legal and secretarial cost, launching a new product or process etc. are no more treated as deferred cost and shall be amortized over a number of periods.

Indian GAAP:

Under Indian GAAP, paragraph 56 of AS-26 & guidance notes 34- treatment of expenses during construction period deals with startup cost and pre operating expenses. It states that any direct revenue expenses which are incurred during the construction period are allowed to be capitalized and vice versa in case of indirect revenue expenses.

US GAAP:

SFAS-7 deals with the concept of pre operating expenses. Surprisingly, the concept of pre operating expenses itself doesn’t exist. In other words, SOP 985 under US GAAP provides clear cut guidelines regarding the treatment of respective expenses. Firstly, the business enterprise shall prepare income statement and balance sheet as it were a normal running organization and secondly, such expenses have to be charged to revenue and assets are capitalized as a normal organization.

AUSTRALIA GAAP:

Under AUSTRALIA GAAP, paragraph 14 of FRS-15 deals with the accounting treatment of pre operating cost. Under AUSTRALIA GAAP, the accounting treatment of pre operating expenses are made on the basis of nature of activity. In other words, the pre operating expenses shall be treated in the same manner as similar cost incurred as a part of entity’s ongoing activity. On the contrary, if the pre operating cost is not the part of business ongoing activity then the expenses related with pre operating expenses shall be included in the cost of tangible fixed assets if certain criterion is met.

Research question:

How IFRS in different countries is being utilised – case study of Australia, USA and India

Methodology:

In order to analyse the research question, researcher will be utilising the deductive approach of research where hypothesis will be developed to analyse the research question. Through considering literary evidences underpinning the thematic analysis approach researcher will be doing qualitative analysis in future instance. Moreover, the researcher will be collecting resources from justified sources utilising PRISMA framework.

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