Looking at International Accounting and Reporting Standards - dummies

Looking at International Accounting and Reporting Standards

The International Accounting Standards Board, or IASB, based in London, is the main authoritative accounting standards setter outside the United States. (The accounting standards followed in the U.S. are called Generally Accepted Accounting Principles, or GAAP.)

The IASB was founded in 2001. Over 7,000 public companies have their securities listed on the several stock exchanges in the European Union (EU) countries. In many regards, the IASB operates in a manner similar to the Financial Accounting Standards Board (FASB) in the United States, and the two have very similar missions. The IASB has already issued many standards, which are called International Financial Reporting Standards.

The two main authoritative accounting rule-making bodies — the FASB and the IASB — are not on a collision course. Just the opposite: They are on a convergence course. They are working together toward developing global standards that all businesses would follow, regardless of which country a business is domiciled in. Of course political issues and national pride come into play.

One major obstacle deterring the goal of world-wide accounting standards concerns which sort of standards should be issued:

  • The IASB favors a principles-based method. Under this approach, accounting standards are stated in fairly broad general language and the detailed interpretation of the standards is left to accountants in the field.

  • The FASB follows a rules-based approach. Its pronouncements have been very detailed and technical. The idea is to leave very little room for differences of interpretation.

The two authoritative bodies have disagreed on some key accounting issues, and the road to convergence of accounting standards may be rocky. The stability, development, and growth of an economy depend on securing capital from both inside and outside the country.

The flow of capital across borders by investors and lenders gives enormous impetus for the development of uniform international accounting standards. In the coming decade, there may be more and more convergence of accounting standards in different countries.