Want to learn more about NSU or are you ready to apply? Becoming a VIP is the first step! Click below and complete the form to create a personalized VIP website. We'll send you updates and provide a checklist with next steps in the admissions process. Already a VIP? Login here.
Whether you’re looking to advance in your field or start a new career a degree from NSU will help you get there. Click below if you would like to receive more information on a specific graduate degree program. If you are ready to start the application process click on Apply Now.
The adoption of International Financial Reporting Standards (IFRS) was intended to be the common global accounting language that the entire world was to adopt so that companies could be compared, not only within national boundaries but across them as well. It is greatly understood that international borders are becoming less of a barrier and many companies today are becoming more multinational and therefore the need for such standards are becoming exceedingly prevalent.
The International Accounting Standards Committee (IASC) which formed at about the same time as the US Financial Accounting Standards Board (FASB), later evolved into the International Accounting Standard Board (IASB) in 2001 as a result of the European Commission’s commitment in the late 1990s and 2000 to adopt International Accounting Standards (IAS) in a very short time for its member nations. As a result of this decision, on April 1, 2001, the new International Accounting Standards Board (IASB) took over the responsibility for setting International Accounting Standards. This group immediately adopted the International Accounting Standards already in place by the IASC as the starting point of this new Board and since that time, the IASB has continued to develop what they now call International Financial Reporting Standards (IFRS).
Because of this heavy push and commitment of the European Commission, other countries took notice and wanted to become part of this new standards body in accounting as well. It was understood though that the framework set out by The International Accounting Standards Committee (IASC) was a bit weak in many areas and needed to be revamped. A good example (just one of many) of this weakness was in the area of revenue recognition. The IASC standard was that revenue should be recorded when it is recognized. That’s it! In contrast to this very broad view of revenue recognition taken under IFRS, in its simplest form, under FASB rules, there are four basic criteria that must be met. (1) There must be persuasive evidence that an agreement exists between the buyer and seller (2) Delivery has occurred or services have been performed (3) The seller’s price is fixed or determinable (4) Collectability is reasonably assured. Then as transactions concerning revenue recognition become more complicated and diverse, additional specific rules come into play under FASB. As you can see here, as opposed to the specific rules set out by the FASB for revenue recognition, management must use its own judgment in applying the rules of revenue recognition using IFRS. The problem with IFRS is that management determines when revenue is recognized. This can be exemplified by using the same transaction in various organizations. Revenue recognition may be determined differently by diverse management groups. So the rules based FASB is currently working on bridging these types of gaps with the IASB trying to come up with a unified global standard. The basic problem between the two groups is that FASB rules are specific rules based on the "Conceptual Framework" in accounting now overseen by the Financial Accounting Standards Board (FASB), while IASB principles are concept based (not rules based) leaving much more room for interpretation of what needs to take place.
So the question that arises here is do you think top management of business organizations will be forcing their accountants to develop and follow a rationale that will see the organization in the most favorable light declaring that their decision to record an accounting transaction in a certain manner was based upon the concepts of IRFS? Because accountants must uphold the principle of objectivity, this could become quite interesting. As you can see too, this is an ethical issue.
The key here is that in the absence of a specific FASB standard that specifically addresses how a particular transaction must be recorded, management must use its judgment, under IFRS rules, to develop and apply accounting policy that results in information that is relevant and reliable. In making that judgment, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses, but does not have any specific rules to follow for any particular type of transaction.
In regards to its ethical issue, let’s review the following:
In general, an ethical decision is based upon two things:Let’s review a simple ethical problem by evaluating the following sentence:
I believe it is wrong to lie because lying shows disrespect for others.
It can be seen that the moral rule or value shown here is "lying shows disrespect for others" and therefore the moral judgment that results is "it is wrong to lie". The key point in this example is that moral judgments are based upon moral rules and values and no one has the same moral rules or values that are placed in the same order or priority as someone else, therefore leaving much room for interpretation of the example sentence presented above. This simple example may show only one right answer or a few at best.
Now let’s look at a more complex situation. You want to buy a pair of shoes. The style, appearance and price of the pair of shoes you are considering to buy are quite favorable. The problem is that those shoes were made in a third world country using child slave labor. Do you overlook the fact that a child slave made the shoes and therefore decide to buy the shoes anyway because they are exactly what you were looking to buy? You may have a dilemma in this situation. If your values are not high about child slave labor, you will probably buy those shoes. If your values are high against child slave labor, however, you will not buy them. The question is at what point do your values change from buying the shoes to not buying them or vice versa? It is important to note that this is a very subjective situation since different people have different views on this situation. It is also important to note that no one’s values are exactly the same with the same priority. This same kind of subjectivity is present in many instances using the principles of IFRS.
Moving forward, let's apply these same rules to a complex accounting situation. Without specific rules there is more leniency in interpreting a transaction based on how different individuals view and prioritize moral and technical rules. Therefore, depending upon the moral rules or values a company holds or how they may interpret the technical ones, two different outcomes may result from the same transaction and there will now be a difference in the financial statements between these two organizations. One interpretation may show more profit than the other but this difference is only based upon the different judgments and values of the different management groups. This situation certainly defeats the goal of comparability. In this instance we cannot even compare the same transaction much less the millions of transactions that happen within a multinational corporation.
The problem may arise also because a company may overlook the purpose of ethical accounting practices. It is important to note that ethical accounting practices are put in place in order to build trust with users of accounting information. Certainly the recording of a single transaction in various ways will not create confidence of the users of this information. For this reason, many companies today have codes of ethical conduct that are meant to predetermine how a member of that organization should act. But using the principle based rules of IFRS, if one can show a higher profit just by changing their personal values or rules, it is important to see that this can have a major effect on the presentation of the financial statements for any one company and therefore the effect that IFRS is trying to make, namely comparability and usefulness of financial information, has now been destroyed.
It is known that FASB rules are much narrower in scope than IFRS principles as a whole. But does it mean that by using FASB's specific rules, FASB has a better system? To look at this situation, let's compare the number of laws on the books in this country to the laws on the books say 50 years ago. I think it is quite conclusive that there are many more laws today than there were 50 years ago. Laws are meant to improve society. But can anyone say that because there are so many more laws today, that society is better off? The obvious answer here is a resounding NO. So what then will make a better society in a moral sense? The only answer here is "impeccable character". Impeccable character is based solely on (1) having very high standards of moral values as determined by society and (2) having the conviction to stand ground in upholding those high values. It is my belief that if the US must use IASB principles today, everyone responsible for financial statement preparation will have a distinct duty to hold the same excellent moral values and display the same impeccable character with utmost conviction.
Another important aspect in today’s society is that anyone or any organization may be sued for any reason at any time at the drop of a hat. Our society today is certainly not less litigious than it was several years ago. Because IFRS principles are more subjective in nature and cover a broader base than the highly specialized and specific rules of FASB, if an organization would choose to use IFRS rules in reporting accounting transactions, it may make these organizations more vulnerable to this type of a loss solely because of interpretation of the IASB principles. It is obviously much easier to defend a hard fast FASB rule if it was used in the proper manner than using a broad principle that has room for interpretation.
In conclusion it must be said that although the IASB and FASB are diligently trying to converge their practices to come up with a unified standard, because of these ethical issues at hand, as well as the comparability and understandability of financial statements, it may be quite some time before IFRS principles become generally accepted in the United States.
Allen Yessman, MAcc, CMA, CPA is an Adjunct Professor of Accounting at Nova Southeastern University in Fort Lauderdale Florida. You can reach him at (561) 496-1600 or yessman@nova.edu.