Thursday, 27 February 2014

P2 wider reading: international convergence of accounting standards


The current issue in P2 Corporate Reporting to which all other current issues at times seem subservient is the international convergence of accounting standards. Capital markets are more global than ever, and global capital itself very agnostic – it is ever seeking its investors desired sweet spot of risk/returns. However, transaction costs may stop capital from migrating to those places where it can do the most good. Interpreting and comparing investment opportunities prepared under different sets of accounting standards is not easy, and often represents a cost that investors are not willing to incur. Hence the demand for standardisation and international convergence of standards.

Many countries have adopted IFRS as the required reporting standards for their listed firms, but in the United States (the world’s largest single capital market) US GAAP reigns supreme, and this situation does not seem likely to change in the near term. In the absence of the US adopting IFRS, the FASB (the US accounting body) and the IASB instead work jointly on amending their standards to make them more similar to one another when the need is pressing.

In any P2 examination question that asks why changes to an existing IFRS are being discussed and/or proposed, it is a safe bet that referencing the IASB and FASB’s convergence project will earn a candidate some marks.

Wider reading
Any accountancy publication will feature stories on international convergence and progress thereto (or lack thereof) quite regularly. The more mainstream media will feature these less frequently, although they occasionally pop in the Business pages of The Economist. For your reading pleasure: an article about the new head of the US’s FASB, who is tasked with helping with the convergence project; and two articles about the challenges that still face the global harmonisation of accounting standards.

With regards to your exam preparation, I would only recommend delving deeply into this topic if you are quite certain you will attempt the current issue question of your P2 examination – the topic is unlikely to feature in any great detail elsewhere on the paper.

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