IFRS Adoption in EU: From National to IASB Standard-Setting - Essay Sample

Introduction

Before the IFRS was adopted, the national level used to set the European Union's accounting standards. The national level was a conglomerate of private and public players, as stipulated by the European Parliament (Palea, 2015). As stipulated by Eroglu (2017), each nation had its accounting standards. Once the IFRS was introduced, the process of standard-setting transformed to the IASB, which was delegated the mandate to develop the standards. IASB is a private body that was charged with the responsibility of making decisions on matters involving financial accounting practices and how they affect the socio-economic processes (Palea, 2015). The body decides on the second-largest capital market in the world. It is, however, controlled by the IFRS Foundation, which is also a non-profit private body.

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Although the trustees of the IASB are selected through a monitoring board that ensures no political and commercial influence, it has been established that expert knowledge is highly politicized (Palea, 2015). The politicization comes into play because it takes place in a social context that is characteristic of the political-economic structure and social relations. For instance, the monitoring board comprises the Financial Services Agency of Japan, the European Commission, the U.S. Securities and Exchange Commission, and the International Organization of Securities Commissions (Palea, 2015). Key actors include the private financial sector, manufacturing sector, the companies, labor unions, and the domestic regulatory agencies. These actors have structural power that strongly affects the decisions of the IASB. The process demonstrates consistency issues regarding the standard-setting and endorsement process, an issue that led to the outcry of the G-20, making a recall to have the governance of the IASB adjusted (Palea, 2015).

As part of the developed and powerful countries, the U.S. is one of the nations that influenced the standard settings' decisions. Eroglu (2017) argues that the IFRS was controlled by the U.S., and rather than adopting a system that does not feature a single country but multiple jurisdictions, the IFRS featured "a set of U.S.-supported Anglo-American accounting standards” that are connatural to the U.S. GAAP (p. 464). The U.S. influenced the decisions because it possessed powerful and multiple institutions and actors such as FASB and SEC.

According to Devi and Samujh (2015), establishing the standards that entrusted exclusively to a small circle of Western experts made the development of the global accounting standards challenging. Highlighting the undertakings in the Australian and international academics, professional accounting bodies and regulators, Devi and Samujh (2015), posited that the standard-setting processes are a political interplay. Developed countries are more powerful than the developing countries, and often the latter face a lot of pressure in convergence to IFRS and globalization. Often, the developing countries possessing less power, are misrepresented or insufficiently represented when discussions are made on the formulation of the standard. Therefore, SMEs in the developing countries could not voice their concerns or even make suggestions regarding the progress made in the sector. The developed countries considered the merits of convergence, but the majority of the developing countries were exposed under pressure to convergence. In this regard, the convergence of the IFRS is not a fair process but a political process characterized and dominated by specific actors' powerful and organized interests.

According to palea (2015), there is a need to research further on the present financial reporting regulation to establish if it aligns with the objectives of the European Union and how such objects can be attained. Devi and Samujh (2015) call for in-depth academic input and participation in SME standards development through the IASB.

Annotated Bibliography

Devi, S., & Samujh, R. (2015). The political economy of convergence: The case of IFRS for SMEs. Australian Accounting Review, 25(2), 124-138. https://doi.org/10.1111/auar.12048

The authors explored the processes utilized in choosing the International Accounting Standards Board (IASB) trustees amid the convergence of the International Financial Reporting Standards (IFRS). The authors posited that the entire financial reporting process is politically instigated, and thus, there is no fairness. The transformation of thought into action is a political mechanism. Some countries influence some decisions, and there is hence the need for harmonization and standardization of the process.

Eroglu, Z. (2017). The political economy of international standard-setting in financial reporting: How the United States led the adoption of IFRS worldwide. Northwestern Journal of International Law and Business, 37(3), 459-516. https://doi.org/10.2139/ssrn.3079256

The purpose of the article was to show how the U.S. influenced the decisions of the IASB and the making of the standard-setting process. The author sees harmonizing accounting standards as a good move that enabled developing countries without accounting standards as highly beneficial. The irony is that despite the U.S. being very influential in developing the accounting standards, it prevents the U.S. listed companies from reporting using IFRS.

Palea, V. (2015). The political economy of fair value reporting and the governance of the standards-setting process: Critical issues and pitfalls from a continental European union perspective. Critical Perspectives on Accounting, 29, 1-15. https://doi.org/10.1016/j.cpa.2014.10.004

Paleo (2015) argues that the financial reporting process is dominated by powerful actors based on institutional context and shapes social and economic processes. The author analyzes the issue of the standard-setting process in the lenses of the influences it experiences politically, economically, and socially. Rather than being a fair value process governed by the forces of nature, Paleo (2015) posited that the standard reporting process is humanly created.

References

Devi, S., & Samujh, R. (2015). The political economy of convergence: The case of IFRS for SMEs. Australian Accounting Review, 25(2), 124-138. https://doi.org/10.1111/auar.12048

Eroglu, Z. (2017). The political economy of international standard-setting in financial reporting: How the United States led the adoption of IFRS across the world. Northwestern Journal of International Law and Business, 37(3), 459-516. https://doi.org/10.2139/ssrn.3079256

Palea, V. (2015). The political economy of fair value reporting and the governance of the standards-setting process: Critical issues and pitfalls from a continental European union perspective. Critical Perspectives on Accounting, 29, 1-15. https://doi.org/10.1016/j.cpa.2014.10.004