Unfusitory Uniform Accounting Standards

If we consider the case for mandatory uniform accounting standards, IFRS boosters typically take the stance that mandatory standards are self-evident. The fundamental economic function of accounting standards is to provide ‘agreement about how important commercial transactions are to be implemented’ (Ball, 1995:19). Take for example; If a lender were to agree to lend a borrower capital but would only do so under the condition that the borrower will not exceed 65% of debt financing with respect to tangible assets, it will undoubtedly help to have an agreement on how the borrower/company is to count their tangible assets as well as its current debt. This brings to light questions such as: are mono-cancellable leases debts? What about unfunded health care commitment to employees? Or expected future tax payments due to transactions that generate income now? Similarly, there needs to be agreement as to what constitutes a profit in order to provide audited profit figures to shareholders.

Important financial and legal concepts such as leverage (gearing) and earnings (profit) require outlining and specified accounting methods that should be followed in recognising and reporting these figures. Following these methods constitutes an agreement as how to implement such concepts. Methods of accounting are an integral component for contracting between firms and other parities such as lenders, shareholders, customers, suppliers and managers and if there is any failure to specify and outline the accounting methods used before a certain type of transaction takes place will inherit the potential to create uncertainty in pay-offs for both contracting parties. For example; If there is no advanced agreement on whether or not commitment to unfunded he...

... middle of paper ...

...a reporting entity anywhere in the world so it would seem that standards are not the only method in solving this accounting problem. Under the ‘principal based’ accounting techniques where the use of general principles are used instead of strict accounting rules, are developed in advance and then applied to a given future state of an entity and then approved by an independent auditor, it is therefore not optimal for every accounting transaction to be recorded and reported under the same set of uniform standards. One other reason to expect less-than-uniform standards in a voluntary setting is that firms and or countries that use varied accounting methods do not fully incorporate the costs inherited on to others due to the lack of report comparability and therefore it seems that a mandatory uniformity in accounting practises such as the IFRS appears to be rationale.