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THE ADOPTION OF INTERNATIONAL ACCOUNTING
STANDARD IAS/IFRS, AMONG ACCOUNTING
REVOLUTION AND DEVELOPMENT OPPORTUNITIES
Antonio NETTI
AILOG financial and economic expert, Italy
Abstract: The introduction of International Accounting Standard marks an
important step for the unification and the development of the financial markets and
of the European State Company. The “globalization” of economy has determined
the demand for a “common language” in order to write the balance, to allow the
stakeholders (of any nationality) to understand the companies performances.
The aim of this article is to illustrate the reasons which have induced the European
Union to introduce this new rule, fundamental issues and opportunities that these
important changes have produced.
Keywords: IAS (International Accounting Standard), IFRS (International Financial
Reporting Standard), IASB (International Accounting Standard Board), Fair value,
Historical cost, Prudence
With the regulations of 1606/2002 the European Parliament and the Union
European Council have established that since 1 st January 2005 any company of the
European Union, quoted in a regulation market, and those that prepare the
admissions to the quotation of our securities, must adopt international accounting
standard.
This choice is very important for the Economy of the European States because the
efficiency and the competitiveness of financial markets derive from quality,
comparability and transparency of financial informative. Because of these reasons
European Directives have not been adequate to obtain this purpose: the Directives
have controlled contents, general postulates and forms of annual accounts, in order
to avoid a strong impact on the national legislation, though not considering many
important aspects.
This situation has compromised the comparability of the balance but also the aim
to provide shareholders and stakeholder with a complete homogenous and
comprehensive informative. These are the reasons for the European Union to decide
to introduce the accounting rules accepted in the economic and financial world, with
the aim to exceed the issues emerged in the last years, to favour the financial market
integration and to increase the comparability of the balance.
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It is very important to underline that it is a very remarkable legislative
revolution: the new rules aren’t technical interpretative or integrative dispositions of
the national regulations but rules which are laws for any country of the European
Union. Besides, the international accounting standards are issued from IASB a
technical but not political organism: this enables a flexible accounting discipline
adjustment to the change of economy (compared to the directives which very slowly
absorb the transformation of the economical and financial context).
As for the technical aspect , it is very important to underline that the passing from
IAS to IFRS (see key words), has determined a new way of understanding the
accountancy and the balance. Continental European countries (Germany, France,
Italy) have an accounting system based on two important principles: “historical
cost” and “prudence”.
This model wants to grant a privilege informative needs to creditors and owners
in relation to the feature of this economical system characterized by stable owners
and a major utilization of capital credit.
In this context the use of “historical cost” and “prudence”, as valuation’s
standard, is considered an objective parameter to value the company’s situation; in
the first case the valuation is made at a “purchase’s cost”, while, according to
“prudence”, the positive component matured, though not realized, is excluded from
income, while include losses even if these are potentials.
The new accounting rules are based on the principle of “market value”. This way
of valuation is utilized in Anglo-saxon countries where the economical system is
based on the “public company so the management is divided by the owners, with a
situation of asymmetry informative between governance and property.
In this situation it is very important to have a reliable informative with uniformed
and standardized rules to compare the performance of the company and to obtain
many investments.
With “fair value” the investor may have e better view of the company’s situation
because the valuation of a market value provides an “immediate vision” of market
fluctuations and period results.
To understand the means of this important change we can make a simple
example.
“Tangible assets”
According to “old accounting rules” the first valuation is at historical cost. The
goods must be amortized in relation to “useful live” ex. Initial value 100.000 €,
useful live 10 years, amortization 10.000 € for 10 years, the sinking fund is
increasing until the end of amortization.
According to “market accounting rules” the first valuation is at purchased cost (in
the first purchased cost, historical cost and market cost are the same value, because
it is the same value of a normal market transaction ) and then there is a “periodic
analysis” to verify the current value and so to proceed to value or to devalue the
goods. In this way the goods can increase value in useful live while, according to the
historical cost method, this is impossible because of the prudence principle.
As one may see “Anglo-saxon rules” and so new international standards are
oriented to “market vision” that favour shareholder, stakeholder and global player to
evaluate the results of the companies in a global economy.
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This point is very important: a transparent, complete and comparable
“information flow” provides the investor with an “exact framework” about
economical, financial and estate situations of companies.
So it is a mistake to think of the introduction of new accounting rules with the
only aim to create a common language for the reading of the balance: the new rules
are especially an important opportunity to the companies and economy
development.
If an international system of certified and accepted rules may exist in any
country, this seems to mean a major protection for investors who can analyze and
compare safe an reliable information, but also a major capability of the companies to
attract international investment to hold a global (not only local)competition.
In this way we may understand the great opportunity for an underdeveloped state
to expand its own economical and financial system; the best companies may be
attract investments for many investors in the world and have a great capital flow to
continue to invest and increase their business.
Concluding, it is necessary to underline the side effects we may derive from the
application of this new accounting rule.
As we have already said, “market value system” has destroyed “prudence
system”, we may confirm it is also possible for a balance value revaluation to
maintain the yield of investment aligned in the time. This means that with
international accounting standard we may have a marked volatility of income
statement with less reliability of results. Notwithstanding these effects, the new rules
are an instrument of financial and economical communication that is able to analyze,
in a real time, the value fluctuations.
Moreover European legislator is succeeded to give a better representation of any
operation that, in the last years, have demonstrated a very high complication level
(see financial instruments, hedging operations, derivates) to satisfy the needs of a
modern economy.
So we can confirm that the new accounting standards represent an important
change to project European companies to new challenges of modern economy.
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