A SURVEY OF INTERNATIONAL CONVERGENCE | MYACCOUNTINGINFO.NET

Strengths of International Convergence

Proponents of international convergence claim that it has lots of strengths. Donald T. Nicolaisen, former chief accountant of the U.S. Securities and Exchange Commission, stated the following in September 2004:

At a conceptual level, supporting convergence is straightforward. An accounting remedy that transparently reflects the economics of a transaction to readers of monetary statements in the U.K., will also do so for readers in France, Japan, the U.S. or any other country. Similarly, the auditing requirements and procedures which are essentially the most powerful are most likely to be exactly the same in the U.S., Canada, China, or Germany. Disclosures relevant to investors in Italy, Greece or the Middle East, are most likely to become just as helpful to investors inside the U.S. and elsewhere. Getting high-quality standards for accounting, auditing, and disclosure positive aspects investors and reduces the expense of accessing the capital markets around the globe. In brief, convergence is great business enterprise and fantastic for investors.

In April 2005, Nicolaisen wrote the following: Key forces favoring a single set of generally accepted accounting standards are the continued powerful expansion of the capital markets across national borders and the desire by countries to achieve robust, stable and liquid capital markets to fuel economic growth. A thriving capital industry requires a high degree of investor understanding and confidence. Converging with or embracing a typical set of high quality accounting standards contributes immensely to this investor understanding and confidence.

If a company’s financial statements are prepared employing accounting standards which are not viewed as being of top quality or with which the investor is unfamiliar, then investors may well not have the ability to completely recognize a company’s prospects and therefore could insist on a risk premium for an investment in that company. The relative cost of getting capital will thereby raise for those providers. And, in the extreme, if as a result of providers employing weak or incomplete accounting standards it becomes excessively time-consuming or tricky for investors to distinguish great investment opportunities from negative, investors may perhaps pick rather to invest in what they take into account to become safer opportunities rather than in specific securities which may perhaps basically supply higher reward.

Financial statements prepared applying a popular set of accounting standards aid investors superior comprehend investment opportunities as opposed to financial statements prepared under differing sets of national accounting standards. With out frequent standards, international investors should incur the time and effort to know and convert the financial statements so that they can confidently compare opportunities. This process is timeconsuming and can be tricky, from time to time causing investors to resort to educated guesses as to content and comparability. In addition, if investors are presented with financial info that varies substantially depending on which accounting standards are employed, that may cause investors to have doubt about the actual monetary outcomes of a firm, resulting in a correspondingly adverse effect on investor confidence. . . .

Embracing a frequent set of accounting standards can also lower expenses for issuers. When providers access capital markets beyond their property jurisdiction, they incur additional costs of preparing financial statements using diverse sets of accounting standards. These include things like the costs for organization personnel and auditors to learn about, keep present with and comply with the needs of several jurisdictions. Similarly, use of resources dedicated to standards writing could potentially be optimized if fewer separate accounting models are pursued.

Lastly, a recent paper argued for “global GAAP.” Amongst the advantages cited are:

1. High-quality financial reporting standards which can be employed consistently about the globe increase the efficiency with which capital is allocated. The expense of capital will likely be reduced.
2. Investors can make superior investment decisions. Portfolios are far more diverse and monetary risk is reduced. There's a lot more transparency and comparability among competitors inside the international markets.
3. Companies can increase their strategic decision-making in the merger and acquisition location.
4. Accounting understanding and skills might be transferred seamlessly about the globe.
5. The most effective ideas arising from national standard-setting actions might be leveraged in developing international standards with the highest top quality.

To summarize, most arguments for accounting convergence relate in 1 way or yet another to escalating the operational and allocational efficiency of capital markets.