The International Politics of IFRS Harmonization

by Karthik Ramanna

Overview — Contrary to its staid image in popular culture, accounting has reigned at the forefront of globalization over the last decade. As of 2010, about 100 countries, including all of the world's major economies, either have adopted a common set of accounting principles known as International Financial Reporting Standards, have initiated an IFRS harmonization program, or have in place a national strategy to respond to IFRS. In fact, the proliferation of IFRS worldwide is one of the most important developments in corporate governance today. Through a series of case studies on Canada, China, and India, Assistant Professor Karthik Ramanna analyzes key similarities and differences in the international political dynamics that contribute to countries' responses to IFRS. His framework helps explain and predict countries' decisions on IFRS harmonization, as well as the potential structure and impact of IFRS in the future. Key concepts include:

How countries respond to IFRS depends on 1) their access to political power at the IFRS's rule-making body, the International Accounting Standards Board (IASB), which is based in London, and 2) their own direct political power at the IASB.
While international politics is not the only or even the deciding element in understanding the growth of IFRS, it is very important.
The politics of identity is key in a country's IFRS response strategy.
While the Chinese government has been successful in making its voice heard at the IASB, the ability of other emerging markets to do so is less clear, as illustrated by Ramanna's case about India.
Ramanna describes the development of IFRS over its first decade, particularly the role of the EU member states and their interests in the establishment and subsequent direction of the IASB.

Author Abstract

The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of the international political dynamics of countries' IFRS harmonization decisions. The analysis is based on a field study of three jurisdictions in particular: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize these jurisdictions' IFRS responses: proximity to existing political powers at the IASB; and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.