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Accounting, in any country, takes place within the social, political, legal, and

economic institutions of that country. In this book, we have taken north american
market-oriented institutions largely for granted. However, as capital markets
become more integrated worldwide, investor are increasingly investing in firm in
foreign countries, whose customs, institutions, and accounting standards may
differ from those of investors home country. Arguably, integration leads to
better-working capital markets, lower costs of capital and increased investment,
and more efficient contracting across the integrated markets. Consuquently, any
evaluation of the political aspects of standard setting must now take
international integration into account.
One response to capital markets integration is to pursue a common set of
international accounting standards. Indeed, as noted in section 1.12.5, this is the
basic objetive of the IASB. To the extent that a common set of standards
becomes acceptable to securities regulators as a substitute for local GAAP, costs
of multiple stock exchange listings will fall. This should lower firms financial
statement preparation costs. It may also lower their costs of capital, as they are
better able to tap more liquid surces of financing. Also, a common set of
international standards shoul decrease network externalities. That is, increased
financial statement comparability may decrease costs for analysts and other
financial statement users, who do not then have to familiarize themselves with
more than one set of GAAP. Consequently, the working of securities markets, and
cross-border investment, should improve.
Empirical evidence supports this argument. Covrig, DeFond, and Hung
(2007) studied stock holdings of mutual funds for a large sample of firms from 29
countries, excluding the United States and Canada. They found that foreign
mutual funds (i.e., funds not lcocated in the same country as a sample firm)
included in their portfolios a significantly higher number of shares of firms that
had voluntary adopted IASB standards, relative to firms using their local GAAP.
Also, Tan, Wang, and Welker (2011) studied 25 countries that adopted IFRS
standards during 1988-2007, finding that the number of foreign analysts (i.e.,
analysts located in a country other than the IFRS-adopting country) following
firms in the adopting country increased. They also found that the earnings
forecast accuracy of foreign analysts increased. The increase in accuracy was
greater as the difference between IFRS and analyst local GAAP decreased. These
results suggest an increase in financial statement comparability from IFRS
However, U.S accounting standards have worldwide influence too,
particulary for foreign firms that wish to raise capital in the United States. The
convergence question then becomes, should convergence be to IASB or FASB
standards? A response is to converge these two sets of standards to each other.
In this regard, the 2002 Norwalk Agreement between the FASB dan IASB
commits the two bodies to work toward a common set of high-quality standards.
Some progress has been made toward IASB/FASB standard convergence. For
example, IFRS 2 requires expensing of ESOs, as does ASC 718-10-30 (Section

8.6). IFRS 3 requires the purchase method of accounting for purchased Goodwill.
Goodwill is not amortized but is subject to an impairment test. These
requirements are similar to SFAS 142 (now ASC 350-20-35) (see sectuion 7.11.2).
Both IASB and FASB standards now require other comprehensive income (section
1.10) to immediately follow net income in a single statement of comprehensive
income, or in separate statement immediately following the net income
statement. Also, the derecognition provisions of IFRS 9 are converged with ASC
860-20 (Section 7.8).
Yet, differences remain. For example, IASB standards do not allow the LIFO
inventory method. IAS 16 allows upward revaluation of property, plant, and
equipment, whereas historical cost is generally used in the United States and
Canada. Development costs may be capitalized under IAS 38, while in the United
States, almost all R&D is expensed.