Globalization of the business environment presents challenges in accounting. Accounting in international business must adhere to requirements specific to the markets where the business operates. However, different countries have different accounting standards. As a result, global accounting standards have become a major concern in the accounting profession. Internationalization is seen as a trend, although barriers abound. The main goal is to increase effectiveness of accounting across international borders. This situation pushes for changes in accounting standards. Global accounting standards must be developed to enhance the accounting profession in the international arena.
This article discuses global or international accounting standards, changes in accounting, accounting methods, the role of the International Accounting Standards Committee (IASC), the role of the International Accounting Standards Board (IASB), and conventional vs. Islamic accounting.
Changing World Environment and International Accounting Standards
The changing world environment leads to increased focus on international accounting standards. This environment involves the continuing globalization trend. Globalization makes business organizations operate at the international level, leading to greater interconnections among economies. Growth of economies around the world leads to the rise in the significance of accounting practices from various countries. Countries are experiencing greater international transactions, such as in terms of equities and bonds. This condition highlights the significance of international accounting practices and international accounting standards.
There is now an increased demand for international accounting standards that can be applied uniformly across various countries or regions. A driver of this situation is the increase in international investment, which requires the use of similar or uniform standards for effective investment evaluations. The globalization of companies has also led to more international offices and subsidiaries, as well as partner firms across various regions of the world. Moreover, capital markets and crediting entities are experiencing increased activity at the international level.
This condition makes more organizations suffer from the difficulties in using different accounting standards for different markets. Managers and leaders are continually pressing for the use of uniform accounting standards to make it easier to prepare financial reports and perform financial analyses. International accounting standards are increasingly scrutinized for appropriateness in analyses and comparisons of credit quality.
Differences in Accounting Methods Applied Internationally
Differences in accounting methods applied at the international level are in terms of financial accounting practices of companies that belong to different regions or economies. There are also differences in requirements imposed on companies regarding financial information disclosure. These requirements vary across regions. There are also significant differences in accounting methods in auditing practices and compliance requirements imposed on firms in different countries. Other differences are in terms of goodwill, business combination methods, tax allocation practices, practices and standards used in LIFO inventory costing, and the use of reserves across economies.
Five Major Classifications of Accounting Models in Different Geographical Regions
The five major classifications of accounting models used in various geographical regions are as follows:
- Anglo-Saxon accounting model (US)
- Anglo-Saxon accounting model (UK)
- Asia-Pacific accounting model (Japan, China, other Asian countries)
- German accounting model (Germany)
- Latin accounting model (France, Italy, Latin America)
These five major classifications differ because of the original accounting practices employed in these countries prior to the rise of globalization. Regional agreements already existed in the past. These regional agreements influenced the accounting practices used in different regions for financial accounting.
Roles of the IASC and the IASB in International Accounting Standards
The role of the International Accounting Standards Committee (IASC) in establishing international accounting standards is to ensure that the world moves toward better standards for accounting. The IASC is concerned with the development of accounting standards for use in various countries. Not all standards from the IASC are readily accepted in different countries because changes in accounting standards have potential negative effects and governments would need to support the change. The International Accounting Standards Committee is the main source of the International Financial Reporting Standards.
The role of the International Accounting Standards Board (IASB) in establishing international accounting standards is to serve as a decision-making body for the implementation of the international accounting standards created and issued by the International Accounting Standards Committee.
Conventional vs. Islamic Accounting
Conventional accounting uses standards for modern commerce. Emphasis is on the permission of activities rather than the ethicality of accounting practices. In contrast, Islamic accounting has strong emphasis on ethical accounting practices rather than just the commercial considerations of accounting practices. Also, conventional accounting generally supports limits imposed on disclosure of financial information. In contrast, Islamic accounting supports complete disclosure of financial information. Thus, Islamic accounting puts greater emphasis on ethics and transparency in accounting practice.
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