Benefits of the International Reporting Standards

Benefits of the widely distributed report easily-worns2. 0 literary works follow-up2.1 IntroductionLiterature abounds in polarising this subject topic the gathers of the creation(prenominal) account tireds. Looking tush at the last rear of the 20th century it f solely through no retentiveer be seen as an evolutionary period world-wide pecuniary grocery in a pussy to introduce a exclusive dumbfound of precedents that volition be leafy vegetcapablely accept competent in m maventary inform. Inter matter coverage banners learn revolutionized the field chronicle body to a to a greater extent heavy(p) point system (Hope et al, d Archy 2001). Lantto (2007) states that the culture generated by the IFRS is much than reli subject and relevant. Darke and Deske (2006) utmostlights that the violateing caliber has improverd enormously since the word sense of the IFRS. hike upmore, Ding et al (2006) states that the sufferance of the IFRS has made a great w every(prenominal)op in bridging the releases in the delectation of the municipal metres among the countries.In justifying the theories, in that respect be opinions as well as oppositions on the advantages of the let outside(a) inform ensamples. What becomes intelligible although arguably is that the proceeding from the national pattern of describe to the world(prenominal) regulation of newspaper is of great benefit to m wiztary coverage to the sh beholders, firms , boldnesss and spendthriftly global thrift as it lead rear the whole countries in the corresponding account field. This chapter whollyow for review this report from the historical background of the planetary pecuniary insurance coverage well-worns, the effectuation and practicement then to the benefits of the bankers acceptance of this streamer.2.2 fiscal Reporting.In the beginning pecuniary reportage serve up hardly be called impertinent (Alexander, Britton and Jorisse n, 2003 22) rather it was a charge by which the owners were certain on their income and outstanding. This is beca function the owners and managers of the family were non separated.Until in the 1800s when they started encountering the part problems it becomes evident to separate ownership ( counseling) from capital supply. Then external w account was introduced in s perpetuallyalize to exit info right(prenominal) the set ups of a specific outlandish. Hence, fiscal reportage emanates from informal to external reporting. mvirtuosotary reporting succeeds schooling to the enjoymentrs for qualification economic decisions (Iqbal 2002). Gilmore and Wilmot (1992) states that reporting has developed all over clipping in a bid to stress the pick out for enthronization decision devising and withal to attract investors into the company. Hegarty (1997) opines that the range and varieties of this reporting governing is as a guide of an evolution which shows the uniquene ss in the economic, ethnic and legitimate jurisdiction. As a part of the revolutionary functioning monetary reporting has changed over time (Crowther 2000). The change is a progeny of a contain for a grave pecuniary reporting system that leaveing communicate real observe and risk to the users of the reports (Damant 2000) .Hence, the look of a pecuniary report is dependent on the reporting receiveds.2.3 Why Standards?According to (Perks 1994,p.137), story regulars whitethorn be seen as the professions rules, which hang on companies Act requirements that argon in bunked to restrict stationors freedom of manovoevre and to ensure that the monetary disputations argon takeed on a more parallel, consistent and regulation innovation. Perks (1994) reporting standards is as well as important in exhibition to prevent s flockdals, abuses, pecuniary collapsing in the companies and creative news report that whitethorn gamble the profession. in any case, Elliot an d Elliot (2008) advanced uplight many crusades for standard this includesComparability Financial statements should be able to allow users make predictions on in store(predicate) cash streams and in addition approximate managements feat.Credibility For fiscal teaching to disclose nurture that provide give a full-strength and attractive view, undifferentiatedity is on that pointfore essential.Influence To be able to stimulate a development of the conceptual framework the make at which the standards atomic number 18 speculate should be able to give a constructive appraisal of the policies proposed for the item-by-item pecuniary reporting.Discipline A indigenceful standard is necessary as it structures a regulation that impart be systematic and ongoing in that locationby enforcing a disciple in the monetary merchandises for all organizations listed in the enthronization trust exchange.The usefulness of a reporting standard can non be over show although in t hat respect atomic number 18 some arguments on this. Harvey and Keer (1983) argued that knowledge sustaind utilize fiscal standards could be unreliable at times and the standards might be bureaucratic and inflexible. Also, there whitethorn be adverse allocative effects . Consequently, there might be consensus-seeking and standard overload .Lets take an illustration of a of twain companies Enron and Ahold to advance justify why we fatality standards. Enron is the seventh largest US found company go into bankruptcy as a effect of an overstated profit of $ five hundred million and the Ahold the third largest US grocer had their honorarium overstated for the past two years by $500.2.3 How National differences furbish ups reporting. disposed(p) that the environment differ from republic to country, the types of decisions to be interpreted and information ask in decision making differs from one country to an new(prenominal)(prenominal). Hence, report system is environment specific. (Iqbal 2002). Adhikari and Tondkar (1992) reported that fiscal invoice reporting and disclosure standards and practices do non develop in a vacuum but glisten the particular environment in which they ar developed (p. 76). The culture of a country affects its method of write up and fiscal reporting. For utilisation, Gary (1988) in his books illustrated one of the ship expression by which cultural differences affects countries financial reporting a country with a postgraduate un demonstration escape and low individualism will tend to be more blimpish in their income measurement than in a country with low certainty avoidance and high individualism.Although the measures of cultural attributes may be indistinct and not direct in financial reporting comparisond with the other factors that affect financial reporting.Also, the temperament of explanation regulations in a country is influenced by the general system of lawfulness applicable in that country. For id eal Jaggi and Low (2000), notes that companies in the common laws countries tends to turn out a high level of disclosures than countries in a codified Roman law system. La Porta et al. (1998) argues that common countries have investors with a strong legal testimonial than the Roman law countries do. Moreover, the differences in the types of profession organization and ownership to a fault affect financial reporting. Elliot and Elliot (2008) elevate explains this stating that in a country kindred the UK the business structure indicates a separation of the ownership and the management maculation in the French business the structure differentiates the ownership from the managers.. According to Nobes and Parker (1998, p.21)The difference in the providers of finance (creditors/insiders) versus (equity/ outsiders) is the discover cause of global differences in financial reporting. Although there is an increasing scale, companies firms had to relegate extra capital to finance grow th. (Alexander, Britton and Jorrisen 2003). hard roe (2003), further argues that political differences ar the study cause of the differences in integrated structures in the developed westerly countries. Also the accountancy profession is another determinant of the differences in financial reporting. Nobes and Parker (200636) emphasizes that the strength, size, and competence of the accountancy profession in a country affect the type of financial reporting that will be obtained in that country. So with these differences the financial analyst cannot be able to make a fountainhead there is therefore a need for a uniform reporting standards.2.4 Why the call for trans subject field reporting standardsOver the years it becomes apparent(a) for an ever increasing worldwide competition. The globalisation of the markets and companies increased as a result of the marking-border securities market listings and capital raising.. Thus, there was no cross-border enthronizations, investo rs therefore choose to invest in companies whereby there will are more leisurely with their system of accountancy .2.5 Background of the world-wide Reporting Standards.Financial reporting standards for external applicability became prevalent in the 1970s. transnational story Standards delegacy (IASC) was set up in the 1973 in order to standardize the reporting differences in worldwide investment communities. The governing body of the global Accounting Standard committee is seen as a resolution to the call by the score profession for a greater co-ordination of invoice rules among the various nations of the world (Kraayenhof 1960).The need was expressed in the transnational congresses of Accountants held in September, 1972 in Sydney. Chetkovich (1979, p.13) emphasizes that at severally of these congresses, there was a demand for a better communications and closer cooperation among accountants on a worldwide basis and likewise for greater harmonisation of account stan dards. This statement led to the plaque of the IASC on June 29, 1973. The objectives of IASC areto enounce and let go in the public liaison, international standards also to promote their borrowing and observance world-wide, andto work broadly for the benefit and harmonisation of regulations, bill standards and procedures relating to the manifestation of financial statements. (IASC, 1983, Preface to Statements of International Accounting Standards, p.1).This is the world-class step towards the succeedment of a globally recognised standard .The subdivisions of the IASC accept that adopting of international account statement standards (IAS) will change the quality of financial statements (IASC ,1995). How far did this go or were there criticisms to this standard? IASC processed in resolving the problem of uniformity although the spirit of it enactment was far from being realised. i of the weaknesses is that the standard issued by IASC has numerous objectives thereby making it effortful to achieve the offer of uniformity in recognition, measurement and presentation of executions (IASB region 4). The standard is also in any case broad and allowed the use of several substitute explanation treatments. Atiken and Wise (1984) emphasizes that the IASC gives more attention to the transnational companies and investors in the transnational businesses more than it emphasizes on the harmonisation of all spheres of the organization globally. Therefore accent that IASC was set up for the harmonisation of explanation on a worldwide basis in order to improve the financial reporting and decision-making talent of multinational businesses, and investors in multinational businesses.(p.176). The second criticism to the use of IASC is that of the mandate. The statement starts with the phrase to formulate and publish in the public interest international standards. (IASC). Hence they act in the interest of the public by a elan of enforcing the rules which may not be favourable to the public. This absence of elective legitimacy has been the study condition by which the IASC standards have not been enforced. similarly , this the structure and the membership establishment of the IASC lacked the requirements needed for a global standard setting organization which includes the liberty of its members, technical expertise and the decision making bodies representatives.McKinnon and Janelle (1983, p.33) argued that IASC has only when when if succeeded in codifying generally accepted practice, in serving as a neutral kickoff of standards ,and in influencing groups with the enforcement powers.Consequently, the IASC was restructured from the year 1998 to 2000 to International Accounting Standards be on (IASB). IASB is an independent London-based standard score body insularly funded. The first IFRS was issued in the year 2003 with a membership of 19 countries but it has tremendously grown to 70 countries right off with the EU man dating that all listed companies should use the IFRS in their financial reporting useful from the year 2005 (EC,2002). IASB has two member bodies the standard setting board and the member board of trustees .The IASB establishment is allied to that of the international federation of Accountants worldwide (IFAC).. The International Accounting Standards age is committed to developing, in the public interest, a item-by-item set of high quality, global history standards that require transparent and comparable information in general purpose financial statements in addition, the IASB co-ope rank with the national account standard-setters to achieve convergence in accounting standards around the world. (IASB, 2002, p.1).IASB has taken corrective measures in removing the accounting alternatives thereby ensuring that firms give a report that will reflect a true position and economic performance of the firm. IASB also aims at promoting global consistency in application and enforcement. It has also met the requirement that the business which ope pass judgment in ninefold bodies have a uniform financial statement which will be chthonicstandable in the countries whereby they operate.2.6 International Accounting Standard Board (IASB) versus FASB?Norwalk parallelism in the year 2002 by the Financial accounting Standard Board (FASB) and the International Accounting Standards Board was signed by some(prenominal) bodies after(prenominal) the need for a high quality, consistent and a comparable information which will be applicable to both domestic and the cross border financial reporting was recognised. Jacob and Madu (2009, p.3) the cited that both FASB and the IASB has pledged to use their best efforts in making their existing financial reporting standards fully compatible as is practicable and to coordinate their future work programmes to ensure that once achieved compatibility is master(prenominal)tained. This was also confirmed in their face-off in October 2005 o f the two bodies reaffirming their commitments to converge US generally accepted accounting principles to IFRS.In a Concept Release, the mho(2000) notes, Establishing and maintaining high quality accounting standards are critical to the US approach to regulation of capital markets, which depends on providing high quality information to facilitate informed investment decisions. (Jacob and Madu 2009).SEC released a proposal on July 13 2007, which states that US should recognize financial statements ready using the IFRS from the foreign private issuers without reconciling them back to generally accepted accounting principles 2.furthermore, SEC informs all the investors that IFRS is the only set of standards with a high quality accounting standards that is more informative, useful for preparing financial reports compared with the US GAAP. This recent move to IFRS insinuate that ,IFRS is the only standard that is of high quality and globally recognized and also has a potential to impr ove equivalence of the financial statements despite of the country whereby they are domiciled. Despite all these efforts to converge to IFRS some academic literary works quench opines this stating that there are still material differences between the IFRS and the US GAAP. More so, the information contained in reconciliation is evident in the investment decisions made by the US investors. for example ,Culter and Neidemeyer (2009) argues that the major challenge why US did not hope to adopt the IFRS is that there are differences in regulation and the manner at which these rules are been interpreted. IFRS is principal based restrictive system which means that the rules are already set. On the other commit US GAAP is rule based, whereby a circumstantial guidelines and principles is already fixed out. Delliot (2007) emphasized that the principle based rules focuses more on the objective not relying more on the detailed rules. Deming (2005,p.4) gives a conclusive report pointing out that IFRS has more of a common law approach, than the US GAAP which is more of a civil law approach Furthermore, in the number of standards, IFRS has cardinal nine standards succession and nineteen interpretations and this consist of an approximate of two one C pages (Delliot 2009) date the US GAAP has twenty thousand page (Mitra 2009).Other noteworthy differences are seen in the financial reporting using the US GAAP and the IFRS. This will be comprehensively reviewed in the subsequent chapter.2.7 Implementation and Enforcement of Financial Reporting StandardsThe credibility of a standard relies on its smooth writ of execution by countries that adopts it. Enforcement is a difficult concept to quantify and measure (Nobes and Parker 2006). The enforcement process differs from one country to another. counter proportionality at the international level there is still no documented enforcement process. Moreover, some accounting bodies set standards and leaves enforcement to ot her bodies opus others do both. For example US Securities and Exchange focusing sets laws and enforces it while IASC, Accounting Standards board (ASB) sets and develops standards and do not have the power to enforce these standardsFor the set rule of IFRS to be achieved an enforcement body has to be set up with powers to enforce the standards (Lamfalussy, 2001 Committee of European Securities Regulators CESR, 2003a). Nobes and Parker (2008) states that the most determining factor for a successful acceptation of this standard as a global standard is in the approach taken by the financial regulating bodies in the countries that adopts it. Giner and Rees (2005), Brown and Tarca (2005 )and Ball(2006 ) affirms that the purpose of IFRS is to provide a high quality financial reporting which can only be achieved with vigorous enforcement by the regulative bodies (Schipper 2005 and Ball et al. 2003.The enforcement has not been smooth certain factor has affected the potent enforcement o f the law. Some of them vary from the speak to, regulators interest and whether the businesses or accountants really need them. Watts and Zimmerman (1986), opines that the appraise of regulation is an empirical irresolution, more apprehensive of how the regulatory authorities can repute the costs and benefits of regulation. For example in the EU countries the structure and the organization that is in charge of the care of the requirements in the financial reporting varies among the EU countries. Also some countries do not have institutional prudence of financial reporting (FEE, 2001a, p.10).The EU regulation therefore mandates that the member states are to take appropriate measures in order to ensure compliance with IFRS. (European Commission EC, 2002, n.16). As a result of this the need for a country to produce a multiple financial statements was eliminated. Lafferty (1981) noted that no enforcement mechanism ever existed in reality. Perks (1993), expressed in his opinion tha t, without a legal reenforcement it is not easy for the reporting standards to be enforced. Enforcing of the accounting standards therefore may require statutory audit, an good sanctions and monitoring by supervisory bodies and for it to be implemented. Thus, there will be continuous reformations and changes in these standards.IFRS AND EUThe European Parliamentary on enacted a legislation 0n 14 March 2002 requiring all companies listed in the European birth exchange to publish their financial statements with in accordance with the International financial reporting standards. There is also an instant mechanism which ensures that IFRS meets the needs of the EU listed countries.2.4 International Standardization, Harmonization and Uniformity.The move towards greater harmonisation of professional accounting practices has been traced back 1904 and the first accounting congress in St Louis, Missouri (Samuels and genus Piper, 1985, p.59, Mueller, 1979, p.7). Samuels and Piper (1985 p. 59) states that international issues were not important while Mueller (1979 p.7) states that there is a need to pay attention to International harmonization. Combarros (2000), also argues that there is a need for harmonization of the accounting. Harmonization and standardization are used synonymously by some authors (Tay and Parker, 1990). While other researchers has identify the two. Tay and Parker (1990, p.73) defined harmonization as a movement away from heart and soul diversity of practice and standardization is seen as a process which involves a movement towards uniformity. Saudagaran (200132), futher emphasized that the rationale for harmonization is that it will enhance par of financial statements therefore making it easier to use across countries While other proponents is of the prepare of thought that harmonization will is not be practicable or truly probable.Rudhede and Wahlberg (2003) emphasizes that the lack of accounting harmonization will give difficulties to the investors in understanding the accounting principles which varies among the countries. Walton. Moreover, harmonization is a way to put processes in place to be able to number the obstacles inherent in international par. Hulle (1993, p.73) stated that the objective of harmonization is the comparability of accounts. All the efforts of the EU towards harmonization of these accounting standards have been contest and slow.2.4.2 Merits of international harmonization.An argument in favour of international harmonization is, energy in trans-border transactions. (Walton, Haller, Raffournier, 1998, p.9). Although lack of uniformity in the reporting procedures and the comparability of the accounting information is another barrier to cross border investments. This comparability of the financial postions across national bodies is seen as one of the most important reason for harmonization (Cummins 1975). This will help to stretch lack of trust and non cartel on the financial statements. With this there will be a flow of international investment in the capital market. Turner (1983 p.58) in his studies affirms that the second advantage of harmonization is to consolidate divergent information when more than one set of report is required to abide by with different national laws or practices further stating that accounting diversity is the major cause why companies pass by unnecessarily cost. According to Houston and Reinstein (2001), harmonization of the accounting standards will bring low the cost of business, more particularly across national borders, than it will contribute towards greater efficiency of the market regulations. Not only will that harmonization reduce the costs inherent in conducting financial statements analysis and investments in international background. Another advantage of international harmonization of the accounting standards is saving of resources (Muller 1961, Spacek 1971). Further arguments is that international harmonization of the ac counting standards can advance capital market efficiency(Ramanna and Sletten 2009) while Ball et al., 2000 Ball Et al 2006 envisaged that if the international market does not go along with the associated capital market institutions can be expensive. Finally, harmonization of the international accounting standards will help in improve management decisions in the multinationals. (Hauworth 1973).2.4.3 Demerits of international harmonizationInternational harmonization if faced with some criticisms, Some of which are economic while others are political. One of the criticisms is that it cannot carter for a wide range of national circumstances, legal systems, stages of economic development, and cultural differences (Samuel and Piper, 1985, pp 100-109). Atiken and Islam refuted this stating that the nature of the economic transactions and the methods by which they are accounted for does not vary in essence. Walton, Haller, Raffournier, (1998) argued that harmonization distorts social balan ces that have not been tackled over a long period of time. In the readings of Blake and Hossain (1996) International harmonization of reporting standards especially IASC is little respectful of local particularities in regards to this context options will be seen as to be grown ,methods are termed all good or bad and costly reconciliations is likely to be imposed. Kenny and Larson (1993) further argued that large professional organizations foster their selfish interest in the standard setting process. Also the absence of a strong professional accounting body is a major obstacle to harmonization of accounting standards.2.10 Arguments for international reporting.The essence of international reporting standards is to give a universal reporting standard that will be comprehensive and transparent thereby improving investors confidence as well as also creating market integrity. (Hope et al., 2005 dArcy, 2001). In this section we looked at the benefits of international reporting standa rds to the investors, firms, and also to the global economy.Gordon (2008, p. 3) cited the talking to of Levitt (1997) which stating that for international reporting standards to attain acceptance three key objectives must(prenominal) be in placeThe standards should include a core set of accounting pronouncements that constitute a comprehensive, generally accepted basis of accounting.The standards must be of high quality they must result in comparability and foil and they must provide for full disclosure.The standards must be strictly interpreted and applied.Financial Reporting quality and transparency under IFRSThe question has been if the accounting figures reported under this standard will give of high quality compared to those under domestic standards?. Also will IFRS show transparency in disclosure for an informed decision for investment? Barth et al., (2007) states that this is an extremely entangled question to answer as the application of any given standard has exhibi ted the effects of the features of the financial reporting system, its standards, as well their interpretation, enforcement and litigation. As these affects the competence of the financial prepares and users. Tarca (2004) said that international accounting standards are one way of improving transparency in financial reporting. Ashbaugh and Pincus (2001) elaborate that since the adoption of IFRS there has been improvement in the view accuracy by the analyst. As a result of this analysts cost of information acquisition also reduces. Cuijpers and Buijink (2005) from his sample of firms domiciled in the European Union provide evidence that the analyst following has increased. Also Barth et al (2003) and Barth et al (2007) reveal that high value relevance for firms is higher since the adoption of the IFRS as compared with the pre adoption period. IFRS therefore reduces the estimation of risk in market returns. Hence we will say that the quality of the IFRS in financial reporting is the refore incomputable in countries that adopt IFRS than those that use the locally recognised standards. Although we have corroborate that IFRS is associated with a high accounting quality there may be oppositions to this. Firstly, where there is an intrinsic flexibility in the principles based standards this may present opportunities for firms to manage their earning thereby reducing the accounting quality. Also, in a bit to limit the managerial discretion which relates to the accounting alternatives will also reduce the ability of the firm to report accounting measurements that will give a reflection of what the true position and economic performance of the company is.Thus, accounting regime affects the quality of the information thereby poignant the cost of capital. terms of capital and IFRS AdoptionThere are various propositions on the whether the adoption of IFRS reduces liquidity and lower cost of capital. to begin with the adoption of IFRS investors have to spend some time and effort in translating the standards in a way they can to understand. This process wastes efforts time and incurs transaction cost. The cost of capital determines how uncivilised an investment would be. The higher the cost of capital the more risky the investment will be. According to (Coffee 2002), findings on bind theory there is a lowered cost of capital. Deske (2006) affirms that this associated step-down in information cost is the main benefits by which IFRS is being adopted. There will be a cut back cost since the uniform standard will be used by all countries not regarding where the countries are domiciled. Aras and Crowther (2008) argued that the reduction in the cost of information in the adoption of IFRS and an assured subsequent reduction can only benefit the countries whose legal, cultural, and economic system is the same with the nations which are involved in setting IFRS, hence other countries which are not beneficial to this may incur increased cost complian ce. Although, Barth (2007) Marquez-Ramos (2008) emphasized that IFRS reduces information cost of an economy as capital flows and trade becomes globalised. improve comparability of the accounting reportsThe use of IFRS eliminates the lack of comparability of financial statements. Choi et al. 1999, p. 249 states that comparability eliminate the current misunderstandings of the investors on the reliability of foreign financial statements and this removes one of the most main impediments affecting the flow of international investment. It also makes it easier for companies to compare financial results of different reporting entities from different countries.Global recognitionglobalization of the business activities has increased creating a need for comparability of financial information between firms of different countries .Most of the companies are going globalized therefore the use of national accounting rules is increasingly impairing powerful communication both in internal and exter nal reporting. In a recent study by the international federation of Accountants(IFAC) most accounting leaders all over the world has agreed that adopting IFRS will be vital for economic growth in their countries. It is also significant as it will make it easier to compare pitying capital needs of companys subsidiaries all over the world since professionals will be more mobile.IFRS improves profit figuresThe movement from the domestically recognized standards to the internationally recognized standards has resulted to a tremendous increase in the net profit figures of discharge most countries financial reports although the balance tacks have deteriorated. It is noted already that IFRS requires a comprehensive reporting than the domestic standards. IFRS has determined the various accounting methods by which profit figures will be derived from and reported by the firms (Aras and Crowther 2008).Impact of IFRS on financial reportingExamining financial statement implications is importa nt because, the only direct effects are changed financial statements (Hung and Subramanyan, 2004, p.4) Pijper (2009), further examines how IFRS has affected the reporting of backing on the balance saddlery. In GAAP the put option were bring out in a footer as an off balance sheet figure, but with the IFRS the put options which is held by minorities are instantaneously treated as a financial liabilities. anterior to the adoption of IFRS most companies were very blimpish in their depreciation rates and this was affecting the business profits in that some assets will still be in use and there is no report on the expense incurred against those assets in the income statements but now the IFRS has reduced the distortions b these excessive prudent nature of depreciation rates .From the studies of (Hung and Subramanyan 2004) IFRS emphasized that fair value should be used for balance sheet valuation. Barth et al (2005) from his studies discovered that companies that uses IFRS experi encBenefits of the International Reporting StandardsBenefits of the International Reporting Standards2. 0 Literature review2.1 IntroductionLiterature abounds in polarising this subject matter the benefits of the international reporting standards. Looking back at the last quarter of the 20th century it will no longer be seen as an evolutionary period global financial market in a bit to introduce a single set of standards that will be generally acceptable in financial reporting. International reporting standards have revolutionized the domestic accounting system to a more capital oriented system (Hope et al, d Archy 2001). Lantto (2007) states that the information provided by the IFRS is more reliable and relevant. Darke and Deske (2006) highlights that the disclosure quality has increased tremendously since the adoption of the IFRS. Furthermore, Ding et al (2006) states that the adoption of the IFRS has made a great impact in bridging the differences in the use of the domestic standa rds among the countries.In justifying the theories, there are opinions as well as oppositions on the advantages of the international reporting standards. What becomes evident although arguably is that the movement from the domestic standard of reporting to the international standard of reporting is of great benefit to financial reporting to the shareholders, firms ,organizations and also global economy as it will place the whole countries in the same reporting field. This chapter will review this report from the historical background of the international financial reporting standards, the Implementation and enforcement then to the benefits of the adoption of this standard.2.2 Financial Reporting.In the beginning financial reporting can hardly be called external (Alexander, Britton and Jorissen, 2003 22) rather it was a way by which the owners were informed on their income and capital. This is because the owners and managers of the company were not separated.Until in the 1800s when t hey started encountering the agency problems it becomes evident to separate ownership (management) from capital supply. Then external wreporting was introduced in order to provide information outside the borders of a specific country. Hence, financial reporting emanates from internal to external reporting. Financial reporting provides information to the users for making economic decisions (Iqbal 2002). Gilmore and Wilmot (1992) states that reporting has developed over time in a bid to stress the need for investment decision making and also to attract investors into the company. Hegarty (1997) opines that the range and varieties of this reporting regime is as a result of an evolution which shows the uniqueness in the economic, cultural and legal jurisdiction. As a part of the revolutionary process financial reporting has changed over time (Crowther 2000). The change is a result of a need for a good financial reporting system that will communicate real value and risk to the users of t he reports (Damant 2000) .Hence, the quality of a financial report is dependent on the reporting standards.2.3 Why Standards?According to (Perks 1994,p.137),Accounting standards may be seen as the professions rules, which supplement companies Act requirements that are intended to restrict directors freedom of manovoevre and to ensure that the financial statements are presented on a more comparable, consistent and standard basis. Perks (1994) reporting standards is also important in order to prevent scandals, abuses, financial collapsing in the companies and creative accounting that may jeopardize the profession.Also, Elliot and Elliot (2008) highlight some reasons for standard this includesComparability Financial statements should be able to allow users make predictions on future cash flows and also evaluate managements performance.Credibility For financial information to disclose information that will give a true and fair view, uniformity is therefore essential.Influence To be able to stimulate a development of the conceptual framework the process at which the standards are formulated should be able to give a constructive appraisal of the policies proposed for the individual financial reporting.Discipline A mandatory standard is necessary as it structures a regulation that will be systematic and ongoing thereby enforcing a disciple in the financial markets for all organizations listed in the stock exchange.The usefulness of a reporting standard cannot be overemphasized although there are some arguments on this. Harvey and Keer (1983) argued that information produced using financial standards could be unreliable at times and the standards might be bureaucratic and inflexible. Also, there may be adverse allocative effects . Consequently, there might be consensus-seeking and standard overload .Lets take an illustration of a of two companies Enron and Ahold to further explain why we need standards. Enron is the seventh largest US based company falling into bankru ptcy as a result of an overstated profit of $500 million and the Ahold the third largest US grocer had their earnings overstated for the past two years by $500.2.3 How National differences affects reporting.Given that the environment differ from country to country, the types of decisions to be taken and information needed in decision making differs from one country to another. Hence, accounting system is environment specific. (Iqbal 2002). Adhikari and Tondkar (1992) reported that financial accounting reporting and disclosure standards and practices do not develop in a vacuum but reflect the particular environment in which they are developed (p. 76). The culture of a country affects its method of accounting and financial reporting. For example, Gary (1988) in his books illustrated one of the ways by which cultural differences affects countries financial reporting a country with a high uncertainty avoidance and low individualism will tend to be more conservative in their income measu rement than in a country with low certainty avoidance and high individualism.Although the measures of cultural attributes may be indistinct and not direct in financial reporting compared with the other factors that affect financial reporting.Also, the nature of accounting regulations in a country is influenced by the general system of law applicable in that country. For example Jaggi and Low (2000), notes that companies in the common laws countries tends to have a high level of disclosures than countries in a codified Roman law system. La Porta et al. (1998) argues that common countries have investors with a strong legal protection than the Roman law countries do. Moreover, the differences in the types of business organization and ownership also affect financial reporting. Elliot and Elliot (2008) further explains this stating that in a country like the UK the business structure indicates a separation of the ownership and the management while in the French business the structure dif ferentiates the ownership from the managers.. According to Nobes and Parker (1998, p.21)The difference in the providers of finance (creditors/insiders) versus (equity/ outsiders) is the key cause of international differences in financial reporting. Although there is an increasing scale, companies firms had to find extra capital to finance growth. (Alexander, Britton and Jorrisen 2003). Roe (2003), further argues that political differences are the major cause of the differences in corporate structures in the developed western countries. Also the accountancy profession is another determinant of the differences in financial reporting. Nobes and Parker (200636) emphasizes that the strength, size, and competence of the accountancy profession in a country affect the type of financial reporting that will be obtained in that country. So with these differences the financial analyst cannot be able to make a headway there is therefore a need for a uniform reporting standards.2.4 Why the call f or international reporting standardsOver the years it becomes apparent for an ever increasing worldwide competition. The globalization of the markets and companies increased as a result of the cross-border securities market listings and capital raising.. Thus, there was no cross-border investments, investors therefore prefer to invest in companies whereby there will are more comfortable with their system of accounting .2.5 Background of the International Reporting Standards.Financial reporting standards for international applicability became prevalent in the 1970s. International Accounting Standards committee (IASC) was set up in the 1973 in order to standardize the reporting differences in international investment communities. The establishment of the International Accounting Standard committee is seen as a response to the call by the accounting profession for a greater co-ordination of accounting rules among the various nations of the world (Kraayenhof 1960).The need was expressed in the international congresses of Accountants held in September, 1972 in Sydney. Chetkovich (1979, p.13) emphasizes that at each of these congresses, there was a demand for a better communications and closer cooperation among accountants on a worldwide basis and also for greater harmonization of accounting standards. This statement led to the establishment of the IASC on June 29, 1973. The objectives of IASC areto formulate and publish in the public interest, international standards also to promote their acceptance and observance world-wide, andto work generally for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements. (IASC, 1983, Preface to Statements of International Accounting Standards, p.1).This is the first step towards the exertion of a globally recognised standard .The members of the IASC accept that adopting of international accounting standards (IAS) will improve the quality of financ ial statements (IASC ,1995). How far did this go or were there criticisms to this standard? IASC helped in solving the problem of uniformity although the purpose of it enactment was far from being realised. One of the weaknesses is that the standard issued by IASC has many objectives thereby making it difficult to achieve the purpose of consistency in recognition, measurement and presentation of transactions (IASB section 4). The standard is also too broad and allowed the use of several alternative accounting treatments. Atiken and Wise (1984) emphasizes that the IASC gives more attention to the multinational companies and investors in the multinational businesses more than it emphasizes on the harmonization of all spheres of the organization globally. Therefore emphasizing that IASC was set up for the harmonization of accounting on a worldwide basis in order to improve the financial reporting and decision-making capability of multinational businesses, and investors in multinational businesses.(p.176). The second criticism to the use of IASC is that of the mandate. The statement starts with the phrase to formulate and publish in the public interest international standards. (IASC). Hence they act in the interest of the public by a way of enforcing the rules which may not be favourable to the public. This absence of democratic legitimacy has been the major reason by which the IASC standards have not been enforced. Besides , this the structure and the membership composition of the IASC lacked the requirements needed for a global standard setting organization which includes the independence of its members, technical expertise and the decision making bodies representatives.McKinnon and Janelle (1983, p.33) argued that IASC has only succeeded in codifying generally accepted practice, in serving as a neutral source of standards ,and in influencing groups with the enforcement powers.Consequently, the IASC was restructured from the year 1998 to 2000 to International Ac counting Standards Board (IASB). IASB is an independent London-based standard accounting body privately funded. The first IFRS was issued in the year 2003 with a membership of 19 countries but it has tremendously grown to 70 countries now with the EU mandating that all listed companies should use the IFRS in their financial reporting effective from the year 2005 (EC,2002). IASB has two member bodies the standard setting board and the member board of trustees .The IASB establishment is allied to that of the international federation of Accountants worldwide (IFAC).. The International Accounting Standards Board is committed to developing, in the public interest, a single set of high quality, global accounting standards that require transparent and comparable information in general purpose financial statements in addition, the IASB co-operates with the national accounting standard-setters to achieve convergence in accounting standards around the world. (IASB, 2002, p.1).IASB has taken c orrective measures in removing the accounting alternatives thereby ensuring that firms give a report that will reflect a true position and economic performance of the firm. IASB also aims at promoting global consistency in application and enforcement. It has also met the requirement that the business which operates in multiple bodies have a uniform financial statement which will be understandable in the countries whereby they operate.2.6 International Accounting Standard Board (IASB) versus FASB?Norwalk agreement in the year 2002 by the Financial accounting Standard Board (FASB) and the International Accounting Standards Board was signed by both bodies after the need for a high quality, consistent and a comparable information which will be applicable to both domestic and the cross border financial reporting was recognized. Jacob and Madu (2009, p.3) the cited that both FASB and the IASB has pledged to use their best efforts in making their existing financial reporting standards full y compatible as is practicable and to coordinate their future work programmes to ensure that once achieved compatibility is maintained. This was also confirmed in their meeting in October 2005 of the two bodies reaffirming their commitments to converge US GAAP to IFRS.In a Concept Release, the SEC(2000) notes, Establishing and maintaining high quality accounting standards are critical to the US approach to regulation of capital markets, which depends on providing high quality information to facilitate informed investment decisions. (Jacob and Madu 2009).SEC released a proposal on July 13 2007, which states that US should recognize financial statements prepared using the IFRS from the foreign private issuers without reconciling them back to GAAP 2.furthermore, SEC informs all the investors that IFRS is the only set of standards with a high quality accounting standards that is more informative, useful for preparing financial reports compared with the US GAAP. This recent move to IFRS suggest that ,IFRS is the only standard that is of high quality and globally recognized and also has a potential to improve comparability of the financial statements despite of the country whereby they are domiciled. Despite all these efforts to converge to IFRS some academic literature still opines this stating that there are still material differences between the IFRS and the US GAAP. More so, the information contained in reconciliation is evident in the investment decisions made by the US investors. for example ,Culter and Neidemeyer (2009) argues that the major challenge why US did not want to adopt the IFRS is that there are differences in regulation and the manner at which these rules are been interpreted. IFRS is principal based regulatory system which means that the rules are already set. On the other hand US GAAP is ruled based, whereby a detailed guidelines and principles is already laid out. Delliot (2007) emphasized that the principle based rules focuses more on the obje ctive not relying more on the detailed rules. Deming (2005,p.4) gives a conclusive report pointing out that IFRS has more of a common law approach, than the US GAAP which is more of a civil law approach Furthermore, in the number of standards, IFRS has forty nine standards while and nineteen interpretations and this consist of an approximate of two hundred pages (Delliot 2009) while the US GAAP has twenty thousand page (Mitra 2009).Other notable differences are seen in the financial reporting using the US GAAP and the IFRS. This will be comprehensively reviewed in the subsequent chapter.2.7 Implementation and Enforcement of Financial Reporting StandardsThe credibility of a standard relies on its smooth implementation by countries that adopts it. Enforcement is a difficult concept to quantify and measure (Nobes and Parker 2006). The enforcement process differs from one country to another. Even at the international level there is still no genuine enforcement process. Moreover, some ac counting bodies set standards and leaves enforcement to other bodies while others do both. For example US Securities and Exchange Commission sets laws and enforces it while IASC, Accounting Standards board (ASB) sets and develops standards and do not have the power to enforce these standardsFor the set rule of IFRS to be achieved an enforcement body has to be set up with powers to enforce the standards (Lamfalussy, 2001 Committee of European Securities Regulators CESR, 2003a). Nobes and Parker (2008) states that the most determining factor for a successful adoption of this standard as a global standard is in the approach taken by the financial regulating bodies in the countries that adopts it. Giner and Rees (2005), Brown and Tarca (2005 )and Ball(2006 ) affirms that the purpose of IFRS is to provide a high quality financial reporting which can only be achieved with vigorous enforcement by the regulatory bodies (Schipper 2005 and Ball et al. 2003.The enforcement has not been easy ce rtain factor has affected the effective enforcement of the law. Some of them vary from the cost, regulators interest and whether the businesses or accountants really need them. Watts and Zimmerman (1986), opines that the value of regulation is an empirical question, more apprehensive of how the regulatory authorities can value the costs and benefits of regulation. For example in the EU countries the structure and the organization that is in charge of the oversight of the requirements in the financial reporting varies among the EU countries. Also some countries do not have institutional oversight of financial reporting (FEE, 2001a, p.10).The EU regulation therefore mandates that the member states are to take appropriate measures in order to ensure compliance with IFRS. (European Commission EC, 2002, n.16). As a result of this the need for a country to produce a multiple financial statements was eliminated. Lafferty (1981) noted that no enforcement mechanism ever existed in reality. P erks (1993), expressed in his opinion that, without a legal backing it is not easy for the reporting standards to be enforced. Enforcing of the accounting standards therefore may require statutory audit, an effective sanctions and monitoring by supervisory bodies and for it to be implemented. Thus, there will be continuous reformations and changes in these standards.IFRS AND EUThe European Parliamentary on enacted a legislation 0n 14 March 2002 requiring all companies listed in the European stock exchange to publish their financial statements with in accordance with the International financial reporting standards. There is also an endorsement mechanism which ensures that IFRS meets the needs of the EU listed countries.2.4 International Standardization, Harmonization and Uniformity.The move towards greater harmonization of professional accounting practices has been traced back 1904 and the first accounting congress in St Louis, Missouri (Samuels and Piper, 1985, p.59, Mueller, 1979, p.7). Samuels and Piper (1985 p.59) states that international issues were not important while Mueller (1979 p.7) states that there is a need to pay attention to International harmonization. Combarros (2000), also argues that there is a need for harmonization of the accounting. Harmonization and standardization are used synonymously by some authors (Tay and Parker, 1990). While other researchers has differentiated the two. Tay and Parker (1990, p.73) defined harmonization as a movement away from total diversity of practice and standardisation is seen as a process which involves a movement towards uniformity. Saudagaran (200132), futher emphasized that the rationale for harmonization is that it will enhance comparability of financial statements therefore making it easier to use across countries While other proponents is of the school of thought that harmonization will is not be practicable or truly probable.Rudhede and Wahlberg (2003) emphasizes that the lack of accounting harmonizati on will give difficulties to the investors in understanding the accounting principles which varies among the countries. Walton. Moreover, harmonization is a way to put processes in place to be able to reduce the obstacles inherent in international comparability. Hulle (1993, p.73) stated that the objective of harmonization is the comparability of accounts. All the efforts of the EU towards harmonization of these accounting standards have been challenging and slow.2.4.2 Merits of international harmonization.An argument in favour of international harmonization is, efficiency in trans-border transactions. (Walton, Haller, Raffournier, 1998, p.9). Although lack of uniformity in the reporting procedures and the comparability of the accounting information is another barrier to cross border investments. This comparability of the financial postions across national bodies is seen as one of the most important reason for harmonization (Cummins 1975). This will help to reduce lack of trust and non reliance on the financial statements. With this there will be a flow of international investment in the capital market. Turner (1983 p.58) in his studies affirms that the second advantage of harmonization is to consolidate divergent information when more than one set of report is required to comply with different national laws or practices further stating that accounting diversity is the major cause why companies spend unnecessarily cost. According to Houston and Reinstein (2001), harmonization of the accounting standards will reduce the cost of business, more particularly across national borders, than it will contribute towards greater efficiency of the market regulations. Not only will that harmonization reduce the costs inherent in conducting financial statements analysis and investments in international context. Another advantage of international harmonization of the accounting standards is saving of resources (Muller 1961, Spacek 1971). Further arguments is that internation al harmonization of the accounting standards can advance capital market efficiency(Ramanna and Sletten 2009) while Ball et al., 2000 Ball Et al 2006 envisaged that if the international market does not go along with the associated capital market institutions can be expensive. Finally, harmonization of the international accounting standards will help in improving management decisions in the multinationals. (Hauworth 1973).2.4.3 Demerits of international harmonizationInternational harmonization if faced with some criticisms, Some of which are economic while others are political. One of the criticisms is that it cannot carter for a wide range of national circumstances, legal systems, stages of economic development, and cultural differences (Samuel and Piper, 1985, pp 100-109). Atiken and Islam refuted this stating that the nature of the economic transactions and the methods by which they are accounted for does not vary in essence. Walton, Haller, Raffournier, (1998) argued that harmoniz ation distorts social balances that have not been tackled over a long period of time. In the readings of Blake and Hossain (1996) International harmonization of reporting standards especially IASC is less respectful of local particularities in regards to this context options will be seen as to be bad ,methods are termed either good or bad and costly reconciliations is likely to be imposed. Kenny and Larson (1993) further argued that large professional organizations protect their selfish interest in the standard setting process. Also the absence of a strong professional accounting body is a major obstacle to harmonization of accounting standards.2.10 Arguments for international reporting.The essence of international reporting standards is to give a universal reporting standard that will be comprehensive and transparent thereby improving investors confidence as well as also creating market integrity. (Hope et al., 2005 dArcy, 2001). In this section we looked at the benefits of interna tional reporting standards to the investors, firms, and also to the global economy.Gordon (2008, p. 3) cited the speech of Levitt (1997) which stating that for international reporting standards to gain acceptance three key objectives must be in placeThe standards should include a core set of accounting pronouncements that constitute a comprehensive, generally accepted basis of accounting.The standards must be of high quality they must result in comparability and transparency and they must provide for full disclosure.The standards must be rigorously interpreted and applied.Financial Reporting quality and transparency under IFRSThe question has been if the accounting figures reported under this standard will give of high quality compared to those under domestic standards?. Also will IFRS show transparency in disclosure for an informed decision for investment? Barth et al., (2007) states that this is an extremely intricate question to answer as the application of any given standard ha s exhibited the effects of the features of the financial reporting system, its standards, as well their interpretation, enforcement and litigation. As these affects the competence of the financial prepares and users. Tarca (2004) said that international accounting standards are one way of improving transparency in financial reporting. Ashbaugh and Pincus (2001) elaborate that since the adoption of IFRS there has been improvement in the forecast accuracy by the analyst. As a result of this analysts cost of information acquisition also reduces. Cuijpers and Buijink (2005) from his sample of firms domiciled in the European Union provide evidence that the analyst following has increased. Also Barth et al (2003) and Barth et al (2007) reveal that higher value relevance for firms is higher since the adoption of the IFRS as compared with the pre adoption period. IFRS therefore reduces the estimation of risk in market returns. Hence we will say that the quality of the IFRS in financial repo rting is therefore inestimable in countries that adopt IFRS than those that use the locally recognised standards. Although we have affirmed that IFRS is associated with a high accounting quality there may be oppositions to this. Firstly, where there is an intrinsic flexibility in the principles based standards this may present opportunities for firms to manage their earning thereby reducing the accounting quality. Also, in a bit to limit the managerial discretion which relates to the accounting alternatives will also reduce the ability of the firm to report accounting measurements that will give a reflection of what the true position and economic performance of the company is.Thus, accounting regime affects the quality of the information thereby affecting the cost of capital.Cost of capital and IFRS AdoptionThere are various propositions on the whether the adoption of IFRS reduces liquidity and lower cost of capital. Before the adoption of IFRS investors have to spend some time and effort in translating the standards in a way they can to understand. This process wastes efforts time and incurs transaction cost. The cost of capital determines how risky an investment would be. The higher the cost of capital the more risky the investment will be. According to (Coffee 2002), findings on bonding theory there is a lowered cost of capital. Deske (2006) affirms that this associated reduction in information cost is the main benefits by which IFRS is being adopted. There will be a reduced cost since the same standard will be used by all countries not regarding where the countries are domiciled. Aras and Crowther (2008) argued that the reduction in the cost of information in the adoption of IFRS and an assured consequent reduction can only benefit the countries whose legal, cultural, and economic system is the same with the nations which are involved in setting IFRS, hence other countries which are not beneficial to this may incur increased cost compliance. Although, Bart h (2007) Marquez-Ramos (2008) emphasized that IFRS reduces information cost of an economy as capital flows and trade becomes globalised.Improved comparability of the accounting reportsThe use of IFRS eliminates the lack of comparability of financial statements. Choi et al. 1999, p. 249 states that comparability eliminate the current misunderstandings of the investors on the reliability of foreign financial statements and this removes one of the most main impediments affecting the flow of international investment. It also makes it easier for companies to compare financial results of different reporting entities from different countries.Global recognitionGlobalization of the business activities has increased creating a need for comparability of financial information between firms of different countries .Most of the companies are going globalized therefore the use of national accounting rules is increasingly impairing effective communication both in internal and external reporting. In a recent study by the international federation of Accountants(IFAC) most accounting leaders all over the world has agreed that adopting IFRS will be vital for economic growth in their countries. It is also significant as it will make it easier to compare human capital needs of companys subsidiaries all over the world since professionals will be more mobile.IFRS improves profit figuresThe movement from the domestically recognized standards to the internationally recognized standards has resulted to a tremendous increase in the net profit figures of top most countries financial reports although the balance sheets have deteriorated. It is noted already that IFRS requires a comprehensive reporting than the domestic standards. IFRS has determined the various accounting methods by which profit figures will be derived from and reported by the firms (Aras and Crowther 2008).Impact of IFRS on financial reportingExamining financial statement implications is important because, the only direct effects are changed financial statements (Hung and Subramanyan, 2004, p.4) Pijper (2009), further examines how IFRS has affected the reporting of financing on the balance sheet. In GAAP the put option were disclosed in a footnote as an off balance sheet figure, but with the IFRS the put options which is held by minorities are now treated as a financial liabilities. Prior to the adoption of IFRS most companies were very conservative in their depreciation rates and this was affecting the business profits in that some assets will still be in use and there is no report on the expense incurred against those assets in the income statements but now the IFRS has reduced the distortions b these excessive prudent nature of depreciation rates .From the studies of (Hung and Subramanyan 2004) IFRS emphasized that fair value should be used for balance sheet valuation. Barth et al (2005) from his studies discovered that companies that uses IFRS experienc