Adopting International Accounting Standards;Following a European Union mandate, from January 1, 2005, onwards approximately 7,000;companies whose stock is publicly traded on European stock exchanges were required to issue;all future financial accounts in a format agreed upon by the International Accounting Standards;Board (IASB). In addition, some 65 countries outside of the EU have also committed to requiring;that public companies issue accounts that conform to IASB rules. Even American accounting;authorities, who historically have not been known for cooperating on inter- national projects;have been trying to mesh their rules with those of the IASB.;Historically, different accounting practices made it very difficult for investors to compare the;financial statements of firms based in different nations. For example, after the 1997 Asian crisis;a United Nations analysis concluded that prior to the crisis two-thirds of the 73 largest East;Asian banks hadnt disclosed problem loans and debt from related parties, such as loans;between a parent and its subsidiary. About 85 percent of the banks didnt disclose their gains or;losses from foreign currency translations or their net foreign currency exposures, and two-thirds;failed to disclose the amounts they had in- vested in derivatives. Had this accounting;information been made available to the publicas it would have been under accounting;standards prevailing at the time in many developed nationsit is possible that problems in the;East Asian banking system would have come to light sooner, and the crisis that unfolded in;1997 might not have been as serious as it ultimately was.;In another example of the implications of differences in accounting standards, a Morgan Stanley;research project found that country differences in the way corporate pension expenses are;accounted for distorted the earnings statements of companies in the automobile industry. Most;strikingly, while U.S. auto companies charged certain pension costs against earnings, and;funded them annually, Japanese auto companies took no charge against earnings for pension;costs, and their pension obligations were largely unrecorded. By adjusting for these differences;Morgan Stanley found that the U.S. companies generally understated their earnings, and had;stronger balance sheets, than commonly sup- posed, whereas Japanese companies had lower;earnings and weaker balance sheets. By putting everybody on the same footing, the move;toward common global accounting standards should eliminate such divergent practices and;make cross-national comparisons easier.;However, the road toward common accounting standards has some speed bumps on it. In;November 2004, for example, Shell, the large oil company, announced that adopting;international accounting standards would reduce the value of assets on its balance sheet by;$4.9 billion. The reduction primarily came from a change in the way Shell must account for;employee benefits, such as pensions. Similarly, following IASB standards, the net worth of the;French cosmetics giant LOreal fell from 8.1 billion to 6.3 billion Euros, primarily due to a change;in the way certain classes of stock were classified. On the other hand, some companies will;benefit from the shift. The UK-based mobile phone giant, Vodafone, for example, announced in;early 2005 that under newly adopted IASB standards, its reported profits for the last six months;of 2004 would have been some $13 billion higher, primarily because the company would not;have had to amortize goodwill associated with previous acquisitions against earnings.23;Case Discussion Questions;1.;What are the benefits of adopting international accounting standards for (a);investors, and (b) business enterprises?;2.;What are the potential risks associated with a move toward the adoption of;international accounting standards in a nation?;3.;In which nation is the move to adoption of IASB standards likely to cause the;revisions in the reported financial performance of business enterprises, the United;States or China? Why?
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