Need And Importance Of International Accounting Standards (ias)

Financial reporting frameworks were initially developed within each country

, resulting in significant differences of reporting standards across national boundaries. This caused reporting problems for multinational companies and difficulties for stock market analysts, international investors and economic agencies such as the World Bank and International Monetary Fund. As this information is used to support global investment decisions and to account to international providers of funds, national accounting bodies have been working to develop truly international financial reporting standards. Attempts were made to establish International Accounting Standards (IAS) through the International Federation of Accountants (IFAC). These guided the development of national standards, rather than establishing mandatory international financial reporting requirements. Gradually, agreement was reached within the accounting profession that a reporting framework should be developed to ensure all entities, internationally, report financial information that is:

Relevant: providing feedback on past events; or predictive information about future events

Understandable: allows users to comprehend the results and position portrayed

Reliable: represents faithfully the underlying events, is capable of independent verification and is free from bias in reporting

Comparable: between results of the same entity over time, or between different entities.

Accounting models and policies must cope with national and cultural diversity and with the impact of a very wide range of business activities if they are to gain international acceptance. This will require the international standard-setting bodies to formulate reporting frameworks that ensure the disclosure of the substance of transactions and events and not merely the legal form. These frameworks and the standard-setting process will need to be sufficiently flexible to reflect the range of business activities covered by general purpose statements.

In response to the globalization of business and investment (and several international financial crises and corporate scandals), the International Accounting Standards Board (IASB) was established with effect from 2001. This body is charged with the development and promulgation of comprehensive International Financial Reporting Standards (IFRS) by 2005.

At the same time that commercial complexity of business requires increased reporting flexibility, international pressure is increasing to 'tighten the rules' in the hope of avoiding further commercial failures of the scale of Enron or WorldCom from undermining confidence in the financial community. The professional accounting bodies are responding to these pressures by placing increased emphasis on the conceptual framework approach, requiring the exercise of sound professional judgment, rather than pursuing a rule-based (legalistic) approach. A legalistic approach permits loopholes to be exploited as seen in the case of Enron (and others).

The process by which new financial reporting standards (FRS and IFRS) are developed must be rigorous, yet adopt recognition and measurement criteria that reflect the reality of the business and not merely impose a single 'one size fits all' accounting model.

In September 2002, IASB met in joint sessions with their American counterparts - the Financial Accounting Standards Board (FASB) - who develop the financial accounting standards for the United States. The Boards agreed on: 'the need to produce common, high quality accounting standards across the major international capital markets'. They also committed to 'work together in support of convergence in accounting standards that contribute to the health and vitality of our global capital markets' (IASB and FASB news release, 17.9.2002).

by: Rashid Javed

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