One set of accounting standards for the whole world. This is a great idea!

Isn't it?

The quest for a global set of standards has been on the agenda for decades, but it has not been accomplished yet. This may seem surprising, given some intuitively obvious advantages of adopting the same standards all over the world. Probably the most-advocated advantage is comparability. If the financial statements of all companies around the world were produced using the same set of rules, then it should be substantially easier to compare the numbers in order to compare the performance of different businesses.

Moreover, a unique set of global standards should also intuitively simplify the management and control of multinational groups of companies. These organizations now have to prepare the accounts of their different subsidiaries around the world according to different accounting regulations.

An additional complication comes when these group of companies need to prepare consolidated financial statements. This process of consolidation is done by basically adding up the numbers of all the subsidiaries into a single macro set of accounts for the group. However, as much as it does not make sense to add pounds, dollars, euros and yen, it also does not make sense to add numbers that are not produced consistently. So, before this macro addition can be done, multinational groups of companies must reconcile all the numbers according to a single set of criteria.

Already these two intuitive advantages of a global set of accounting standards, comparability and simplification, should be enough to gather consensus on this policy objective.


So why are we not there yet?

As often happens with many policy issues, a careful analysis of the problem reveals that the solution is far from being so simple and straightforward.

First of all we have to answer a basic question: Which set of accounting standards do we want to choose as the global one?

Unfortunately, this question does not have a single and uncontroversial answer. The real world of business is characterized by a high degree of uncertainty, which is difficult to model objectively. If we ask a group of 20 experts about the likelihood that a certain national sports team will win the next world championship, we will get 20 slightly or not-so-slightly different answers. But television channels must decide whether they want to buy the rights to the matches of this national team based on the probability of a win. Once the decision to buy these audiovisual rights is taken, the television channels may be willing to put them on its balance sheet as "assets." Again, the value of this asset will crucially depend on how likely we believe it to be that the team is to win the world championship.

For many intuitively valuable items out there, we do not find a market functioning in a conventional way, with agents looking to buy and others willing to sell. Staying with the professional sports example, each great champion is somehow special, hence the market for professional players is really a set of unique transactions in which prices are only an imperfect indication of what the next transaction will be. Of course, when a professional sports club acquires a star player, they probably want to register it as an asset for the amount paid to close the deal!


For these two reasons - technically called subjective probability and incomplete markets - accounting numbers are bound to be imperfect and controversial. Consequently, any set of rules that attempts to regulate the process by which these numbers are chosen is also bound to be imperfect and controversial. So one set of standards is not an obvious pick as "better" than another. It is no surprise that the international community has had a hard time in deciding which set of standards should become the globally accepted one.

A second and related issue is the fact that countries are not alike. An imperfect set of accounting standards may work well in a certain economic context, but less well in a different one. If a single set of standards is finally chosen for the whole world, it will likely be "flexible," with various options open for the accounting of the same transaction.

The process of accounting harmonization in the European Union gives us an historical example of a possible final outcome. Even if the EU has officially adopted the so-called International Accounting Standards (IAS/IFRS) for the whole union, individual member countries still keep a high degree of autonomy in adapting the application and enforcement of these standards for the companies based in their countries.

So how do we cope in such a diversified and varied world of accounting standards?


We have to move from a rule-based approach to accounting to a concept-based approach. Accounting should be learned as a set of concepts and methods to be used while trying to determine the most appropriate way to register a transaction. The economic essence of the transaction has to be understood. Then the concepts of, for example, asset, liability, revenue and expense must be used to reach a decision on how to apply the mechanics of double-entry in each particular case.

For example, consider a convertible bond, issued by a company to raise funds. It differs from a conventional bond because the buyer of the bond may decide to convert the bond into shares of the issuing company, instead of receiving back the money lent to the issuing company. It is this flexibility of how to realize the return on the investment made by the buyer that makes a convertible bond special and different from a conventional bond. The buyer should value this additional feature, and will likely pay more than what they would pay for a conventional bond.

Let us also consider the accounting for this bond from the point of view of the issuing company, which can either view the convertible bond simply as a liability (i.e., an obligation to give out company resources to a third party in the future), or it can assume that the bond will be converted and consider it equity (i.e., as capital received from shareholders). Finally, the company can consider the bond a mixture of both and register part of it as liability and part of it as equity. Regulators can pick each one of these three solutions as the standard for convertible bonds.


An accounting teacher has basically two options when teaching accounting for convertible bonds. In a rules-based approach, they will simply teach the accounting treatment chosen by the regulator as the standard in that particular moment in time. Alternatively, in a concept-based approach, the teacher can present all the possible options and only at the end inform the student about the alternative chosen by the regulator as the standard in a certain jurisdiction.

Rules-based teaching can leave students confused if the standard changes, because they may not be accustomed to the idea that standards are imperfect, chosen by consensus in a certain moment in time, and open to change in the future. On the other hand, concept-based teaching will never become obsolete even if the standard changes in the future. The student knows that there exist different possible ways to account for a certain transaction, each one based on a certain interpretation of the economic and business essence of the transaction.

In addition, concept-based teaching prepares the student for new transactions, i.e., transactions that come into existence because of continuous innovation in the business world. For example, accounting for software development cost was not an issue when modern computers did not exist!


To summarize, the establishment of a global set of accounting standards can be open to criticism as a policy goal. Even in the case that global standards are eventually adopted, they are very likely to be flexible and open to different interpretations and implementations. The only way to cope with accounting numbers in general and accounting standards in particular is to focus on concepts more than on rules. This is the only way to be able to properly use and interpret accounting numbers, instead of simply believing and accepting them.

Professor Marco Trombetta is vice dean of research at IE Business School in Madrid, Spain. Some of the ideas in this article are adapted from the article

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