ACT301 – Week 4 Tutorial

Chapter 4: International accounting

4.2 One notable exception to the global adoption of IFRS is the United States. Given
that the US represents the world’s major capital market, the non-involvement of
the US represents a significant limitation in the global acceptance of IFRS.
About a decade ago, the US appeared very strong in its resolve not to adopt
IFRS believing that its ‘rules-based’ standards were superior to the more
‘principles-based’ standards of the IASB. However this resolve to retain their
own standards (and to reject IFRS) appeared to diminish around 2001/2002 with
various ‘accounting scandals’ involving organisations such as Enron.

In terms of whether the US will adopt IFRS in the near future, there is currently
a process being undertaken jointly by the IASB and the FASB (called the
‘Convergence Project’) which is seeking to converge the two sets of standards
thereby paving the way for the US ultimately switching to IFRS. However, at
this point in time it would appear that the US adoption of IFRS for use by US
companies appears a number of years away, if indeed it ever happens. The
adoption of IFRS will be contingent ultimately on whether the SEC and FASB
are satisfied with the results generated by the IASB/FASB Convergence
Project). Nevertheless, from late 2007 the SEC adopted rules that permitted
foreign private issuers (but not US domestic companies) to lodge with the SEC,
their financial statements prepared in accordance with IFRS without the need to
provide a reconciliation to generally accepted accounting principles (GAAP) as
used in the United States.

In terms of some of the factors that might discourage the US from adopting IFRS
one obvious factor is that the FASB, FAF and SEC must be satisfied that the
convergence project has lead to accounting standards that are appropriate to the
US context. In 2007 the FAF also raised concerns about the perceived
independence of the IASB and they argued that before the US adopts IFRS (which
we know emanate from the IASB) certain changes need to be made to the
governance policies of the IASB. The FAF was also concerned that in many

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 jurisdictions there are amendments being made to IFRS at a local level before the
standards are used in that particular country. This will also need to be addressed.

4.5 Firstly, society values are deemed to represent a system of values collectively held
by all members of a particular society, values which in turn affect an individual’s
behaviour. Accounting values can be considered to be the values of a particular
‘subculture’ of that society. Different subcultures within a particular society are
expected to have some common characteristics. According to Gray (1988), it is
necessary to identify the mechanism by which values at the societal level are linked to
values at the subcultural level, as it is the latter values which are likely to influence
directly the development of accounting systems in practice.

For example, Gray considered the four cultural value dimensions developed by
Hofstede (Hofstede’s cultural values included the dimensions of individualism
versus collectivism; large versus small power distance; strong versus weak
uncertainty avoidance; masculinity versus femininity) and then related them to
values that he expected were in place within the accounting subculture
(professionalism versus statutory control; uniformity versus flexibility;
conservatism versus optimism; secrecy versus transparency). The hypothesised
relation between the societal values and accounting values is summarised in
Table 4.1 within Chapter 4.

The accounting subculture values could then be used to explain international

differences in accounting practices. The relationship between society values,
accounting values and accounting practice is summarised in Figure 4.1 within
Chapter 4.

4.10 The argument is that different religious beliefs (which are considered to
transcend national boundaries) would conceivably influence how people do
business, how they make decisions and, as a related issue, the information they
need to make the decisions. Hamid, Craig and Clarke (1993) specifically contrast
Islamic beliefs with ‘Western’ beliefs. They note how notions of stewardship,
often used to explain Western accounting practice, are not relevant to the Islamic
faith as resources are deemed to be held in trust for god, rather than providers of

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 debt and equity capital. Within the Islamic faith, notions of interest returns are
also not relevant (there is a general prohibition of interest on debt). A number of
Western accounting standards specifically consider issues associated with present
values (for example, with respect to accounting for leases or accounting for
liability provisions). These standards are not applicable to faiths such as the
Islamic religion. Also, various conceptual framework projects developed in
countries such as the United States, United Kingdom, Australia and Canada, as
well as the revised conceptual framework being jointly developed by the IASB
and FASB (that is, in part of the ‘West’) discuss the objective of financial
reporting in terms of assisting with ‘rational economic decision making’. Such
decisions, which take into account the time (present) value of money with
associated consideration of interest rates, would be irrelevant within Islamic
states.

Some religions also emphasise the importance of ‘community obligations’ rather

than the individual’s self-interest. Many ‘Western’ accounting methods can be
explained in terms of Gray’s accounting subculture values, which in turn rely
upon Hofstede’s cultural values, such as Individualism versus Collectivism.
Since Western cultural values (such as scoring highly on the dimension of
Individualism) might not relate well to certain religious views, the work of
researchers such as Gray would also suggest the potential irrelevance of some
Western accounting methods to more ‘community-concerned’ religions.

4.20 This is an interesting issue that should spark some debate. At issue is ‘objective
and unbiased’ from whose view. Would the determination that some accounting
information is objective and unbiased by a person in the IASB’s office in
London be the same as a judgment made by somebody in Tehran? Students
should be encouraged to discuss this point. Arguably, objectivity and
perspectives of bias are not culturally independent hence, whether something is
deemed to be objective and unbiased is dependent upon the cultural context in
which that judgment is made.