The Necessity Of Adoption Of International Accounting Standards

Accounting standards act as an important role in the business world, ensuring the different accounting information users get the comparable, reliable and unbiased accounting information. With the effects of globalization, there are great more companies operate overseas. Since the international capital market operates in the different accounting systems from the domestic ones in the investors’ countries, the investors would require more detailed and comparable accounting information to make investment decisions. Ampofo and Sellani (2005) compared the GAAP and IFRS and found that there is difference on the company merger, goodwill and intangible assets, research and development expense, etc. Hung and Subramanyam (2007) also claimed that there are differences between the international accounting standards and Germany accounting standards. Duangploy and Gray (2005) compared the international accounting standard and Japan accounting standards, finding the differences in the inventory measurement, reevaluation of fixed assets, and the correction of accounting errors, etc. therefore, there are many differences between the different accounting standards. The accounting information provided by them can not be compared. To get the comparable accounting information, the information users also need the different companies adopt the international accounting standards. Therefore, there is a trend for the convergence between the international accounting standards and the national accounting standards around the world. This essay mainly discusses the needs and necessity of adoption of international accounting standards. Firstly, this essay will analyze the necessity of adoption of international accounting standards from the perspective of globalization, international trade and increased trends of international investment, etc. then this essay will analyze the needs of accounting information users on the adoption of international accounting standards from the perspective of accounting information quality and accounting information asymmetry. Finally, there is a summary on the findings.
2. The necessity of adoption of international accounting standards

Accounting is a tool in the business world while it also is the product of the economic environment. With the development of the economic society, accounting also needs development. The adoption of international accounting standards also is influenced by the development of international economics. The world is toward the trend of economic globalization, international trade, international investment and multinational companies. Capital market also becomes internationalized. Based on the changes in the economic world, the accounting standards also need changes accordingly to adjust to the developments from economic and social aspects, etc.

Firstly, the economic globalization requires the companies to take international accounting standards. The economic globalization trend is accelerated in the late of the 20th century. Therefore, it is not possible to seek self-development for any country under this trend. Cooperation and harmony are inevitable. Accounting has been considered as the language of business world and thus should be considered as first place in economic globalization. Therefore, the accounting information can directly influence the level of the transaction volume, effective allocation of global resources, etc. from this perspective, to adopt international accounting standard can be essential to promote the comparability and provision of accounting information.

Secondly, there are a set of international organizations to promote the international convergence of international accounting standards. Therefore, there is a trend to adopt international accounting standards. Under the economic globalization there are rich researches and debates on the convergence of national accounting standard and international accounting standards. The key capital markets also require the participants to implement the international accounting standard to improve the comparability of accounting information. to promote the international accounting standards, there are many international regulators joined together, such as European commission, the international association of insurance supervision, world bank, and the international organization of securities commissions, etc.

Thirdly, the increasing number of multinational companies requires the adoption of international accounting standards. The fast development of economic globalization accelerated the development of multinational companies. To reduce the risks caused by country differences, the multinational companies need comparative accounting information to make decisions. From the aspect, the multinational companies need the adoption of international accounting standard.

Finally, international investment activities also require the international accounting convergence. The first step to launch international investment is to make evaluation of the projects. This requires detailed financial information about the projects. Without convergence of accounting standards, the investors can not compare the financial information and make decisions between different alternatives. Therefore, the convergence of accounting standards can reduce the international differences in accounting standards. Then the investors can read and use the financial information in the financial reporting.

3. The influence factors and benefits of convergence toward international accounting standards

3.1 The influence factors of accounting standard convergence

The adoption of international accounting standards can be influenced by many factors. Nobes (1992) classified the countries by their national accounting standards according to the environment factors. Rahman et al (2002) examined the influence of company characteristics, such as industry, size and leverage effects, etc on the accounting standard convergence. The results show that company characteristics can affect the accounting standard convergence. From the process of international accounting standard convergence, international accounting standards, IFRS (international financial reporting standards), has been completely or partially adopted by more and more countries. In the future, there is a trend for more companies to adopt the international accounting standards. However, during the convergence of the national accounting standards toward the international accounting standards, there are many factors which can influence the process. These factors include culture, laws, economics, etc. these factors can influence the international accounting standard adoption from both aspects of accounting standards and practice of accounting. This part will analyze these influence factors from both accounting standards and accounting practices.

From the perspective of accounting standards, the influence factors can influence the setting and guideline of accounting standards. Among the factors that promoting the convergence of accounting standards, politics and economic factors can be obviously of largest influence. Hail et al (2010) analyzed and evaluated the American accounting standard convergence after the financial crisis from the perspective of politics and economics, and argued that the cost benefits and political conflicts are the main factors that drag down the convergence between American accounting standard and international accounting standards. Meanwhile, there also is lawsuit risk and social policy issues involved to influence the convergence of accounting standard (Webster and Thornton, 2004; Chan and Seow, 1996) Hail et al (2009) also claimed that supervision and law environment are also great influence factors.

The guideline for setting the national accounting standards also varies across the different countries. There is principle based and regulation based guidelines. The principle based guideline has great flexibility in setting the accounting standards and practice. Meanwhile, there are more options in dealing with accounting issues. Therefore, the accountants have more independent power in accounting measurement. American accounting standard is regulation based and has definite and detailed requirements on the record and reporting, etc. Webster and Thornton (2004) compared two guidelines and found that the principle based accounting standards has higher level of quality than the regulation based accounting standards.

From the accounting practice perspective, the convergence toward international accounting standards can also be influenced. Hofstede (1980) insists that culture can differentiate the different races and countries. Culture can influence the practice of accounting by influencing the accountants. Based on different culture backgrounds, their practices can be influenced. Gray (1988) indicated that the values of accounts come from the social values, and accounting values can also influence the accounting system. Gray (1988) also proposed the four perspectives of accounting sub culture: professionalism/statutory control, uniformity/flexibility, conservation/optimism, secrecy/transparency. The former two are related to the authority of the accounting standard while the later two are related to the measurement and disclosure of accounting standards. Young (1996) argued that the national system can influence the characteristics of financial reporting and then influence the implementation of accounting standards. Therefore, the difference between the different countries’ systems can influence the implementation of accounting standard convergence. Holthausen (2003) claimed that the different accounting traditions can influence the process and implementation effects of accounting standard convergence. Therefore, in the practice there will be many problems and differences for adopting international accounting standards in different countries with different capital structure and culture, etc. therefore, there is a need for the harmony of politics, economics worldwide to implement the international accounting standards. Lang et al (2006) compared the net profits of non American listed company and the local listed company in the US, and found that there is difference in the comparability. Obviously, these differences come from the different environments of these companies in.

3.2 Benefits of accounting standard convergence

There have been many researches on the benefits of the convergence of accounting standards. Saudagaran and Diga (1998) indicated the greatest benefits of accounting standards convergence can enhance the comparison of financial reports from different countries. Meanwhile, the accounting standard convergence can save the costs for the multinational companies. The convergence can promote the widespread of high quality accounting standards throughout the world. The accounting professionals can also beneficial from the international accounting convergence by seeking the jobs across the world. The convergence of accounting standards can provide the companies more complete report and disclosure more detailed accounting information about the companies to enhance the comparability. This thus can provide basis for the decision making. More complete report and disclosure can reduce the capital cost of corporations. Cooper and Kaplan (1986) indicated that accounting standard convergence can make it easier for foreign investors to invest in foreign countries. The benefits of accounting standard can be divided into two groups: the benefits from accounting information quality and the influence on capital market.

The accounting information quality requires the accounting information to be useable for the decision making. The comparability of accounting information can enhance the usability of accounting for decision making. There are many researches on the influence of convergence of accounting standard on earning quality. Alford et al (1993) studied the accounting earning quality from different countries and found that earning information under the American generally accepted accounting principles has higher level of relevance. McAnally et al (2010) claimed that the earning information in the reporting based on international financial reporting systems can better predict the future cash flow. Armstrong et al (2010) found that the adoption of international financial reporting system improved the problems of low accounting information quality and information asymmetry in European countries. Christensen et al (2008) also claimed that to implement the international financial reporting system can improve the earning information quality and the reaction of market to the earning announcement. However, Jean and Stolowy (2008) analyzed the compulsory adoption of international financial reporting system on the earning quality. The results show that the earning management does not reduced after the international financial reporting system is adopted. Atwood et al (2011) found that earnings persistence under the IFRS has not big difference from that under the GAAP. Van Tendeloo and Vanstraelen (2005) found that the international accounting principles can not significantly improve the earning quality compared with local accounting standard in Germany. Meulen et al (2007) there is significant difference between the generally accepted accounting principles and international accounting systems on accounting earning. Euselinck et al (2008) analyzed the date from 14 member countries of the EU and found there is no significant influence of different accounting standards on the earning quality.

The adoption of international accounting standards can influence the financial analysts. Financial analysts as the main users of financial statements have special and accurate sense to the information shown in the financial reports. Ball et al (2008) found that the differences in the accounting standards will drag down the forecast of foreign financial analysts on the companies and negatively influence their accuracy of forecasting the earnings of foreign countries. The results also indicated that IFRS can disclose more complete information compared with the local accounting standards. This would be beneficial for financial analysts to understand and predict the earning, improving the accuracy of financial analysts’ forecast. Tan et al (2011) from the perspective of financial analysts claimed that the adoption of accounting standards can improve the comparability of earning and usability of accounting information. This also indirectly verified that accounting standards convergence can improve the accounting information relevance. The researches of Lang et al (2003) and Barth (2005) also reached the similar conclusions.

More complete financial report and disclosure can reduce the capital costs. The investors can better estimate the future cash flow. De Franco et al (2009) indicated that international accounting standard adoption can increase the comparability between different corporate reports. This makes the financial reports more useable. Therefore this can promote the international investment. Covrig et al (2007) indicated the international accounting standard users hold higher level foreign funds. Barth et al (2005) found the equity cost of the company which takes the international accounting standards is lower than that of the company that does not adopt the international accounting standards. Li (2010) also support the view point of Barth et al (2005) and found that adoption of international accounting standards reduced the corporate cost by 47%.

4. The needs of financial information users and the adoption of IAS

With the globalization of capital market, the investors from different countries need more information on the target investment projects in order to be profitable. Since the international capital market operates in the different accounting systems from the domestic ones in the investors’ countries, the investors would require more detailed and comparable accounting information to make investment decisions. This needs of financial information users can be explained by the following two main perspectives: accounting information quality and information asymmetry.

`4.1 Accounting information quality and accounting standard convergence

It is obvious that the reliable accounting information has positive influence on the decision making while the wrong accounting information mostly can only produce fault investment decisions. Accounting information thus can directly influence the decision making. To improve the quality of decision making, the investors need high quality accounting information. Armstrong et al (2007) analyzed the reactions of investors to the events that are related to the international accounting standards adopted by European Union. The results show that the investors have positive actions to the events which are beneficial to EU adopting international accounting standards and negative actions to the events that are not beneficial to EU adopting the international accounting standards. The research of Armstrong et al (2007) also shows that the investors would be more positive to the companies which have high level of information asymmetry before adopting the international accounting standards. Barth et al (2008) examined the companies from 21 countries based on the perspective of accounting information quality, and the results show that there are big differences on the accounting information quality of the companies which adopts the international accounting standards between before and after they adopt the international accounting standards. The findings of Barth et al (2008) also find that the accounting information quality of those that adopt international accounting standards is higher than that of the companies that does not adopt international accounting standards. Therefore, to adopt the international accounting standards can improve the quality of the accounting information. Since the accounting information quality is critical to the accounting information users to make correct decisions, to adopt international accounting standards can meet the needs of them. Atwood et al (2010) used the earning and the relevance to future cash flow to measure the accounting information quality to examine the influence of international accounting standard on accounting information quality. Barth et al (2010) take the sample companies during 1995-2006 to analyze the comparability of accounting information under international accounting standard and American accounting standards from the perspective of accounting information quality. The results show that there is comparability and indicated that the companies that did not take the American accounting standards can improve the comparability with the American accounting standards after they adopt the international accounting standards. Therefore, international accounting standards can help the companies outside the US to improve their comparability with US companies. With this, the accounting information users can also compare companies outside of the US with the American companies to evaluate the investment options.

Balsari et al (2010) studied the companies in Turkey from the perspective of accounting information quality and found that to adopt the international accounting standards can improve the stability of earnings. For the small companies and financial companies, international accounting standards have bigger influence. Landsman et al (2010) based on the sample companies from 27 countries to find that adopting international accounting standards can improve the information contents in the earning announcements.

As discussed above, accounting information quality is critical to the accounting information users since they need the correct information to make decisions. According to the researches from former studies, adopting the international accounting standards can improve the accounting information quality. Therefore, it is necessary to adopt the international accounting standards under this circumstance.

4.2 Information asymmetry and accounting standard convergence

Due to the different accounting standards adopted in different companies, there is problem of information asymmetry. With information asymmetry, accounting information users can not get the information they want. Cuijpers and Buijink (2005) studied the 133 non-financial companies in EU that can adopt international accounting standards and American accounting standards from the perspective of information asymmetry and capital costs. The results show that the number of analysts would increase after the international accounting standard or American accounting standard adopted, but international accounting standard can not significantly reduce the information asymmetry. Daske et al (2008) also studied companies from 26 countries from the perspective of information asymmetry and found that the liquidity significantly increased and cost of equity reduced significantly. Daske et al (2009) realized that companies have the right to decide whether to take international accounting standards. For example, some companies consider international accounting standards as label while they don’t actually implement the international accounting standards. Some other companies may consider adopting international accounting standard as the part to improve the transparency of the company and thus they would stick to international accounting standards. Daske et al (2009) found that to adopt international accounting standard can cause very different economic outcomes. To seriously implement the international accounting standards can improve the market liquidity and capital costs. Leuz and Verrecchia (2000) based on the sample companies in Germany to compare the companies which adopt the Germany accounting standards and those that adopt the international accounting standards. The results show that the companies that adopt the international accounting standards have higher level of trading volumes. Horton et al (2009) examined the influence of international accounting standards on the information environment and the information users have more accurate predication on the companies which has adopted the international accounting standards. Horton et al (2009) argued that the adoption of international accounting standards can improve the accounting information environment.

Due to the difference between the different countries and their accounting systems, it is hard for the investors to acquire enough accounting information from foreign countries. Accounting information in their reports and statements are the main source of accounting information gathering. Information asymmetry can be a crucial issue in the foreign investment. The convergence of international accounting standards can reduce the information asymmetry. Therefore, the accounting information users need the international accounting standards to be adopted and implemented.

5. Conclusions

This essay aimed to analyze the need of accounting information users toward the accounting standard convergence. With the effects of globalization, there are great more companies operate overseas. Since the international capital market operates in the different accounting systems from the domestic ones in the investors’ countries. There are also many factors influence the adoption of international accounting standards. Firstly, the economic globalization requires the companies to take international accounting standards. To adopt international accounting standard can be essential to promote the comparability and provision of accounting information. There are a set of international organizations to promote the international convergence of international accounting standards. Therefore, there is a trend to adopt international accounting standards. The increasing number of multinational companies requires the adoption of international accounting standards. The fast development of economic globalization accelerated the development of multinational companies. International investment activities also require the international accounting convergence. The first step to launch international investment is to make evaluation of the projects. From the perspective of accounting standards, the influence factors can influence the setting and guideline of accounting standards. The guideline for setting the national accounting standards also varies across the different countries. From the accounting practice perspective, the convergence toward international accounting standards can also be influenced. There are also many benefits of accounting standards convergence. accounting standards convergence can enhance the comparison of financial reports from different countries. Meanwhile, the accounting standard convergence can save the costs for the multinational companies. The convergence can promote the widespread of high quality accounting standards throughout the world. The accounting professionals can also beneficial from the international accounting convergence by seeking the jobs across the world.The convergence of accounting standards can provide the companies more complete report and disclosure more detailed accounting information about the companies to enhance the comparability. The adoption of international accounting standards can influence the financial analysts. Meanwhile, the adoption of accounting information can reduce the capital cost of firms. From the perspective of accounting information users, international accounting standards adoption is needed. From the aspect of accounting information quality, international accounting standard adoption can enhance the accounting information quality to promote the investment decision. According to the researches from former studies, adopting the international accounting standards can improve the accounting information quality. Therefore, it is necessary to adopt the international accounting standards under this circumstance. From another aspect, to adopt the international accounting standards can improve the information asymmetry. Due to the difference between the different countries and their accounting systems, it is hard for the investors to acquire enough accounting information from foreign countries. Therefore, there is increasing need for the adoption of international accounting standards.