Different countries whether domestic
or international, have different accounting standards. A common belief is that
these differences reduce the quality and importance of accounting information.
Accounting standards determine the financial reporting quality and provides
separately verified information about an organisation's financial performance
to investors’
creditors.
creditors.
Though there are differences in
accounting methods, domestic businesses are not affected. The accounting system
of a domestic organisation must meet the specialised and regulatory standards
of its home country. But, an MNC and its subsidiaries must meet differing
accounting and auditing standards of all the countries in which it operates.
This leads to a need for comparability between businesses in the group. In
order to successfully manage and organise their operations, local managers
require accounting information, which should be prepared according to the local
accounting concepts and denomination in the local currency. Yet, for financial controllers,
to measure the foreign subsidiary’s performance and worth, the subsidiary’s
accounts must be translated into the organisation’s home currency. This
translation is done using accounting concepts and measures, which are detailed
by the organisation. Investors worldwide look for the highest possible returns
on their capital, in order to interpret the track record, though they use a
currency and an accounting system of their own. The organisation also has to
pay taxes to the countries where it does business, based on the accounting
statements prepared in these countries. Besides this, when a parent corporation
tries to combine the accounting records of its subsidiaries to produce consolidated
financial statements, extra complexities occur because of the changes in the
value of the host and home currencies.
There are many differences between
International Accounting Standards (IAS) and Domestic Accounting Standards
(DAS). On the basis of difference between the two, two indices, namely
'divergence' and 'absence', are created. Absence is the difference between DAS
and IAS; the rules on certain accounting issues are missed out in DAS and
covered in IAS. Divergence represents the differences between DAS and IAS; the
rules on the same accounting issue differ in DAS and IAS.
Measurement of differences between IAS
and DAS
You can measure the differences
between IAS and DAS in the following way:
·
Literature
on international accounting differences – Referring to earlier reports on
international accounting could give more information about the subject. Most of
the earlier reports understand international accounting differences as various
options adopted by nations for the similar accounting problems, which
correspond to divergence concept.
Framework of analysis – Links between variations in accounting standards
and financial reporting quality of various countries could be clearly seen from
the reports published earlier. We should consider the institutional
determinants of accounting differences such as legal origin, governance
structure, economic development, and equity market.