IBM and International Accounting Standards



IBM and International Accounting Standards

International Accounting Standards

Comparable, transparent, and reliable financial information is fundamental for the smooth functioning of capital markets. In the global arena, the need for comparable standards of financial reporting has become paramount because of the dramatic growth in the number, reach, and size of multinational corporations, foreign direct investments, cross-border purchases and sales of securities, as well as the number of foreign securities listings on the stock exchanges. However, because of the social, economic, legal, and cultural differences among countries, the accounting standards and practices in different countries vary widely. The credibility of financial reports becomes questionable if similar transactions are accounted for differently in different countries (Stickney & Weil, 2007).

To improve the comparability of financial statements, harmonization of accounting standards is advocated. Harmonization strives to increase comparability between accounting principles by setting limits on the alternatives allowed for similar transactions. Harmonization differs from standardization in that the latter allows no room for alternatives even in cases where economic realities differ.

The international accounting standards resulting from harmonization efforts create important benefits. Investors and analysts benefit from enhanced comparability of financial statements (Stickney & Weil, 2007). Multinational corporations benefit from not having to prepare different reports for different countries in which they operate. Stock exchanges benefit from the growth in the listings and volume of securities transactions. The international standards also benefit developing or other countries that do not have a national standard-setting body or do not want to spend scarce resources to undertake the full process of preparing accounting standards.

The most important driving force in the development of international accounting standards is the International Accounting Standards Committee (IASC), an independent private-sector body formed in 1973. The broad objective of the IASC is to further harmonization of accounting practices through the formulation of accounting standards and to promote their worldwide acceptance.

One hundred and forty-three professional accounting organizations in one hundred and four countries are IASC members. The IASC Board, presently consisting of sixteen member organizations, is responsible for establishing accounting and disclosure standards. The board follows due process in setting accounting standards, thus allowing for a great deal of consultation and discussion and ensuring that all interested parties can express their views at several points in the standard-setting process. The final standard requires approval by at least twelve member organizations (Tierney, et al, 2006).

On May 24, 2000, a new structure for IASC was approved unanimously by its membership. Under the new structure, IASC will be established as an independent organization that will have two main bodies, the Trustees and the Board. The Trustees will appoint the board members, exercise oversight and raise the funds needed, whereas the board will have sole responsibility for setting accounting standards. It is expected that the new structure would come into effect on January 1, 2001.

The IASC has issued forty International Accounting Standards (IASs) to date covering a range of topics, such as inventories, depreciation, research and development costs, income taxes, segment reporting, leases, business combinations, investments, earnings ...