Lecture 5

Why is there diversity in global financial reporting?

Financial reporting varies globally due to differences in legal systems, sources of finance, and tax regimes. Each country’s accounting standards reflect its unique economic, legal, and cultural environment.

How do legal systems shape financial reporting?

• Common Law (e.g., UK, US): Standards developed by professional bodies. Focus on investor needs.

• Civil Law (e.g., France, Germany): Rules codified in law. Reporting focused on creditor protection and legal compliance.

What’s the role of financing systems in accounting diversity?

• Capital-market-based (outsider): Relies on public investors → Need for transparency (UK, US).

• Bank/government-based (insider): Controlled by few lenders → Focus on solvency and prudence (Germany, Japan).

How do tax systems influence reporting?

In some countries (e.g., Germany, Japan), financial and tax reporting are closely linked. In others (e.g., UK, US), they are separate, allowing more accounting flexibility.

What is IFRS and who sets it?

IFRS = International Financial Reporting Standards. Set by the IASB (International Accounting Standards Board). Aims to create high-quality, enforceable global accounting standards.

Why was IFRS introduced?

To reduce the cost and confusion of different national standards, make cross-border investment easier, and provide more comparable and decision-useful financial statements.

What were early efforts at harmonisation?

• AISG (1966): Compared UK/US/Canada standards.

• IASC (1973): Promoted harmonisation, but lacked enforcement.

• IASB (2001): Replaced IASC. More formal structure and global focus.

What are the main strategies for IFRS implementation?

• Full adoption: Use IFRS with little/no changes (e.g., Australia).

• Substantial adoption: IFRS used, but local modifications made (e.g., EU).

• Convergence: Local GAAP aligned with IFRS, but IFRS not fully adopted (e.g., China, US).

How did the EU adopt IFRS?

From 2005, all listed EU companies had to report using IFRS for consolidated accounts. National standards still used for individual company accounts.

How has China implemented IFRS?

• Developed ASBEs (Accounting Standards for Business Enterprises).

• ~90–95% aligned with IFRS.

• Limits fair value use, prefers cost model.

• Adapted IAS 24 for state-owned enterprises.

Why didn’t China adopt full IFRS?

• Immature capital markets.

• Need for local terminology and interpretation.

• Political/economic concerns.

What is India’s approach to IFRS?

• Developed Ind AS (Indian Accounting Standards), converged with IFRS.

• Modified in areas like prudence, depreciation.

• Legal and industrial resistance delayed rollout.

What is sustainability reporting?

Reporting on environmental, social, and governance (ESG) issues that affect a company’s long-term performance. Goes beyond financial metrics.

Why is sustainability reporting important?

• nvestors want to know about climate, labour, and governance risks.

• Regulators, stock exchanges, and the public demand accountability.

• ESG issues directly affect company value and reputation.

What challenges does sustainability reporting face?

• No single global standard.

• Multiple overlapping frameworks (e.g., GRI, TCFD, SASB).

• Cultural/regulatory differences across regions.

What is the ISSB?

International Sustainability Standards Board, launched by IFRS Foundation.

• Aims to standardise ESG reporting globally.

• Set to issue two standards: IFRS S1 (general ESG) and IFRS S2 (climate-related).

How does IFRS S1 and S2 support reporting?

• IFRS S1: Principles for general sustainability disclosure.

• IFRS S2: Focused on climate-related risks and opportunities.

• Aim to make ESG data useful to investors and aligned with financial disclosures.

What’s the future of international reporting?

• ncreasing focus on non-financial information.

• Greater push for harmonised ESG standards.

• Ongoing debates on balancing global comparability with local relevance.