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Internationalization of Accounting Standards for Consolidation
The purpose of this paper will be to examine problems with internationalization
of accounting standards for consolidations on methods from an international
perspective - specifically, in the US and Japan. This is an especially timely
topic as standardization of financial markets is a prerequisite to international
free trade. Given the trends toward greater globalization, the motivations of
companies for seeking a uniform accounting system are strong. If companies have
to prepare their accounts according to several different sets of rules, in order
to communicate with investors in the various capital markets in which they
operate or for other national purposes, they incur a considerable cost penalty
and feel that money is wasted. This significantly limits global opportunities
for multinational businesses. Thus, it is important to understand what the
differences are between accounting standards, why they exist, and what problems
they pose.
It is worth noting that no one nation has a set of accounting rules which
appears to have such clear merits that they deserve adoption by the whole world.
No one country can claim to have a uniquely correct set of rules. The United
States has the longest history of standard setting. It has the largest standard
setting organization which is characterized by high standards of professionalism.
But, even the rules of the United States exhibit compromises between different
interests of a kind which could have reasonably been decided otherwise.
Furthermore, no unanimity exists among U.S. accountants about the merits of the
precise details of the compromises that have been struck. For example, the
recent discussion memorandum on consolidation outlines three different methods
which are GAAP in the US. No one nation has a clear right, on
the basis of existing achievements, to be regarded as predominant in accounting.
A great deal more work is needed by accountants from different countries before
we can reach the point of having a well founded basis for uniformity.
People who study differences among systems of accounting rules are inclined to
group countries into two categories. On the one hand, there are countries where
business finance is provided more by loans than by equity capital, where
accounting rules are dominated by taxation considerations and where legal
systems customarily incorporate codes with detailed rules for matters such as
accounting.The effect of taxation systems can be particularly pervasive. Often,
the taxation system effectively offers tax breaks for businesses by allowing
generous measurement of expenses and modest measurement of revenues on condition
that these measurements are used for general reporting purposes. Companies have
strong incentives to take advantage of these taxation concessions as real cash
is involved. But the penalty is a jack of full transparency for investors. Major
