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Chapter 13_Solutions

Chapter 13_Solutions - Suggested Solutions to Assigned...

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Suggested Solutions to Assigned Problems in Chapter 13: 3, 4 3. Benefits of adopting IASB standards: Better working capital markets, leading to lower firms’ cost of capital as investors perceive lower estimation risk, thereby increasing their demand for shares of the country’s firms. Lower cost of capital leads to increased investment by domestic firms. Companies can access larger and more liquid capital markets to the extent that their financial statements are accepted in other countries. Adoption of ASB standards increases the likelihood of acceptance. This can lead to increased foreign investment by domestic companies. Increased investor confidence leads to increased supply of investment capital to the economy, both from domestic and foreign investors. Lower financial statement preparation costs, since fewer jurisdictions whose reporting requirements must be satisfied. Lower network externalities. To the extent that other countries use IASB standards, it will be easier and less costly for internationally diversified investors to analyze financial statements. Costs of adopting IASB standards: Financial reporting is affected by local customs, laws, and other institutional characteristics. This can result in differences in the application across countries of the same set of accounting standards. Investors need to be aware of these differences if they are to properly interpret and compare financial statements from companies in different countries. Page  1  of  5
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Increased constituency conflict in the design and implementation of new accounting standards. This can lead to compromises which may reduce standards quality, or lead to an increased number of options allowed by standards. An example is the carveout by the EU of certain provisions of IAS 39. Enforcement of accounting standards may differ across countries, since there is no single body, like the SEC in the United States, to apply uniform interpretation and enforcement of IASB standards.
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