Assessment Task 1 – Issues in Financial Reporting

Question 1

There are many potential benefits associated with the international standardisation of accounting standards. Firstly, the standardisation of accounting standards makes it easier for international investors to better understand, compare, and interpret the financial performance and position of companies from different countries that are in competition with each other or are operating within a similar industry. Greater comparability and analysis of information helps these international investors to make more efficient, educated and intelligent investment decisions, particularly when it comes to deciding between the alternative investments on offer, and helps them to take advantage of the risk reduction that is possible through international diversification.

Secondly, the harmonisation of international accounting standards reduces barriers to capital inflows by helping companies raise capital in domestic as well as international markets. This is useful particularly for those companies that find it difficult to obtain the funding necessary for their long-term growth and expansion projects in their local economy due to a scarcity of resources. To overcome this problem, companies can have their securities listed on foreign stock exchanges and in doing so, be able to significantly expand their base of capital funding. Harmonisation makes this possible because investors as a result are better able to understand the status of companies, thereby also increasing their confidence in investments.

Thirdly, internationalisation of accounting standards has become particularly important amidst the increasing globalisation of business and capital markets as of recent. As a result of harmonisation, multinational companies having operations and investments in different countries will not need to prepare a separate