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The idea of international financial reporting standards as a single global financial reporting language has come to stay. There is no doubt that developing accounting standards can be a difficult and expensive exercise. The substantial cost associated with the development of international accounting standards seems to be borne by only a handful of actors where as other actors (users of the standards) are free riding.

Who pays and who free rides?

The International Accounting Standard Setter i.e the IFRS Foundation thrives as a non-profit private organization who’s business is to commit its rather limited resources solely to the development and promotion of the use of high quality global financial reporting standards. These resources largely come from the generosity of member countries, international organizations, international accountancy firms, accounting regulators, capital market regulators, multinational firms, transnational and national accounting standard setting bodies, international banks and in rare cases governments. Given these rather limited sources of financing and the lack of obligation on the part of these sponsors, it is hard to say how much funding the IASB actually needs to enable it develop credible global accounting standards. However, a quick look through the financial statements of the IFRS Foundation suggests that majority of its funding turns to come from accountancy practicing firms, national accounting regulatory authorities and accountancy bodies that share the dream of a single global accounting standard. These sources of funding got me thinking about the wide usage of the standards as to the number of user countries and the limited funding the IASB currently has.

As many as 120+ countries currently use IFRS globally. However, very few of these countries actually contribute financially to the development of these standards. What is even more surprising is the number of developing countries (especially countries from Africa, Asia and South America) that continue to use the standards without any financial contribution to the development of the standards. Take Africa for a test case. There are 57 countries in the continent and out of this number; about 21 countries currently use IFRS in one form or another either as full scale adopters or users of modified versions of the standards. Nevertheless, only two of these countries have contributed very small amounts to the overall development of the standards. In 2010, South Africa became the only African country to have contributed 45,112 British pounds sterling representing only 0.27% of the income of the IASB.  This example was followed by Nigeria in 2011 who contributed 62,445 British pounds sterling representing 0.30% of the annual income of the IASB. The table below indicates the sources of funding for the development of International Financial Reporting Standards.

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The one who pays the piper calls the tune!

I have often wondered how non-paying users of International Financial Reporting Standards (IFRS) could have influence on the work of the International Accounting Standards Board (IASB). As more countries continue to apply IFRS without contributing to its development, their ability to influence the work of the IASB become weak. Neither can they communicate problems with specific standards nor can they determine the direction or pace of international accounting standards.  Accounting standards by their nature are public goods i.e. the consumption of which by one party can not diminish the consumption of another party of the same good.  Nevertheless, what constitutes how a public good is constructed is on the bases that a common contribution is made by consumers or potential consumers of the same good. But this contribution is only made by a cross-section of the consumers while the others only wait to enjoy the benefits. On this basis, economists define public goods to mean any good from whose enjoyment non-contributors cannot be excluded.  Like many other public goods, the problem of free riding exists where some others pay to finance its construction while others do not pay but enjoy its use as much as those who paid for its construction.

IFRS has come along with such economic problem. IFRSs on this basis have equally come to represent public goods which only a handful of financial contributors make commitments towards the development of the standards while others only apply the standards without any contribution. As many developing countries look to enhance their financial informational needs, they turn to embrace the idea of IFRS and adopt these standards in some cases without the knowledge of the IASB.

The price for free riding the use of these standards is that, actors that contribute the development of these standards turn to dictate the direction of the standards. Non-paying actors will have no influence on how these standards are designed. With little or no voice on the IASB standard setting process by non-paying members, this group of users of the standards stands the chance of applying standards not designed to meet their needs.

(solomon)

In the past few weeks, I’ve been silent here about the microfinance crisis events in India. But why not let others do the talking? This blog published (what I think was) the first analysis of the A.P. events right after the crackdown ordinance; following up with a two-piece search for the underlying causes (1, 2). Most of the causes I speculated about at the time are pretty much turning out to be true:

  • interest rates were far too high and have been rushed down
  • the sector was under-, or practically un-, regulated (especially, if Kaushik Basu says so)
  • the borrowers were/are overindebted (far more than the MFIs were aware of, I assume)
  • and the profit motive created perverse incentives for MFIs.

One prediction I won’t make, though, is whether microfinance in India will pull through. That depends on politics in Delhi (bailout or not?) as much as it does on the adaptiveness (not the resilience, which means “no change”) of the sector. But I wouldn’t bet my money on an MFI in India at the moment, given the pessimism of Vijay Mahajan (“If this situation continues, there will be no microfinance sector in 2011.”) or the SKS’ shareholders (shares down by 52 percent).

The real surprise story of the week, however, were WikiLeaks’ diplo-inslults.

Or really, were they? Only the Americans are really making a big deal out of the leaked diplomatic cables. If anything, the now-public secret assesments of sundry politicians should provide a few good-natured jokes at upcoming international summits. Would-be Israel-nukester Ahmadinejad will hardly be insulted by being compared with “Hitler”, and German Chancellor Angela Merkel and Foreign Minister Guido Westerwelle already had their share of laughs about “their” leaks.

Read the rest of this entry »

It doesn’t happen very often that technical matters like accounting standards make it into the final declaration of a G20 summit, agreed by the heads of government of the world’s leading nations. Nevertheless, yesterday it happened (PDF). After deliberating for two days in the City of London about the appropriate means to cure the most severe worldwide financial crisis since 1929, the leaders of the G20 stated in their declaration on strengthening the financial system

We have agreed that the accounting standard setters should improve standards for the valuation of financial instruments based on their liquidity and investors’ holding horizons…. We also welcome the FSF recommendation on procyclicality that address accounting issues. We have agreed that accounting standard setters should take action by the end of 2009 to … (for more see PDF)

Why did something so mundane make it to the agenda of world politics? While it is certainly the merit of Nicolas Sarkozy’s populist threat to walk demonstratively out of the summit that made bloggers and newspaper writers wonder whether accounting standards could save the G20, the reasons for the G20 leaders dealing with “fair value” and “dynamic provision” are certainly more complex. Some, like David Zaring, also wonder whether the G20 summit produced more than just rhetoric. Read the rest of this entry »

The Book

Governance across borders: transnational fields and transversal themes. Leonhard Dobusch, Philip Mader and Sigrid Quack (eds.), 2013, epubli publishers.
January 2019
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