Another reason to push for common accounting standards

A recent study done by researchers at the University of Arkansas and the University of Missouri shows the effect of having different accounting standards in different countries on mergers and acquisitions. The lack of same or similar standards is a deterrent for companies to merge. The CFO’s have more confidence in reviewing the numbers of the prospective entity to merge with if the acquirer uses similar accounting standards as the acquiree.

Based on M&A deals in 32 countries between 1998 and 2004, the study found that differences in versions of generally accepted accounting principles used by acquirers and potential targets in different countries can decrease the number of mergers. When both companies target and the acquirer used GAAP or IFRS or similar versions of accounting principles, the mergers or acquisitions were more likely to occur.

In that line of thought, high number of transactions occurred between US and UK based entities, as both the countries have similar accounting standards. During the survey’s sample period, there were 1,980 U.S. cross-border M&A transactions targeting UK companies, worth a total of $175 billion. In contrast during the period studied, U.S. companies merged with or acquired only 877 German companies (worth $79 billion in all), due to the dissimilarities in the accounting standards of the two countries.

Another reason for the authorities world over to think about working towards common accounting standards.

Move to IFRS leads to losses for Power companies in India

The adoption of IFRS beginning April of 2011 will have a big impact on both the Income Statement and the Balance Sheet of power companies in India. Under the present Indian GAAP, rate regulated assets/ liabilities are allowed to be recognized, so companies have recognized as an asset or liability- tariffs, fuel adjustments and advances against depreciation.

With the adoption of IFRS, such assets or liabilities will have to be removed from the financial statements. In terms of numbers the initial impact on account of these regulatory assets under IFRS can be as high as Rs.745 crore in case of Tata Power and Rs.1,034 crore for Reliance Infra.

This issue is not centered only on India. This IFRS rule affects power companies worldwide. Just as an example the regulatory assets and liabilities for the electricity companies in the US is estimated to be $675 billion and $450 billion, respectively, in 2007.

For the convergence and standardization of the accounting standards, such anomalies will have to be taken into stride.