Global Accounting Standards - Essay Example

ACFI3424 Coursework Professor (Tutor) The Name of the School (University) The City and State Date ACFI3424 Coursework 1 Global Accounting Standards Standards are a significant feature is guaranteeing quality in any process. Therefore, accounting standards play an important role in financial governing systems. The use of accounting standards allows for efficient markets, enhanced control of financial systems, and better coordination of resources. Overall, accounting standards facilitate the goals of financial control, efficiency, and coordination. Currently, the world has a significant number of businesses scattered across different countries using mutual accounting standards. Nonetheless, the debate around global accounting standards has resulted in arguments for and against that continues to make it challenging to understand the real need or purpose of global accounting standard. According to Tarca (2012), the predictable advantages of global accounting standards are convincing. Tarca (2012), argues that the application of common high quality accounting standards by firms around the world has the capacity to enhancer the transparency and compatibility of financial information. Such use of common standards is a guarantee for quality financial information necessary for sound decision making for market participants. The current focus on adopting global accounting standards is through the acceptance of International Financial Reporting Standards (IFRS). Adopting of IFRS on a compulsory basis was illustrated to rise market liquidity while reducing the cost of capital for firms. Again, the implementation of IFRS has illustrated substantial relationships with a nation’s financial and legal structure and the development of its capital markets. Therefore, using IFRS has the potential to stimulate market efficiency and enhance economic development. Different arguments against the adopting of global accounting standards also raise numerous issues. According to Roberts, et al. (2008), the main disadvantage of adopting IFRS is the current gap in accounting principles especially for countries using the Globally Accepted Accounting Principles (GAAP). The transition of GAAP compliant companies to IFRS is a costly project that may not guarantee results in the short-term but in the long-term. Use of IFRS highlights the critical relevance of applying fair value as the major foundation of liability and asset measurements. Based on the difference in use of accounting standards small companies that would be required to comply with IFRS may incur huge transition costs compared to larger companies. Therefore, there are numerous challenges to the smooth integration and harmonization of current accounting standards to develop global accounting standards. In conclusion, I think there should be global accounting standards. This is because the current accounting standards used i.e IFRS and GAAP have helped in their own way to achieve efficiency, control, and coordination in the financial industry. Therefore, harmonization of these standards can only enable increased control, regulation, and coordination. The need to unite the accounting standards will of great benefits to linking financial systems effectively and enabling businesses and market participants make sound decision internationally. Transparency Transparency is a common word, but its true implementation is not that common. Transparency in disclosure by companies means offering the truth or making the truth available and accessible to others or stakeholders. Transparency is basically being open or offering the truth on a company’s financial information. The openness requires that the specific financial information is made available to external stakeholders both in the financial and governance sectors. The idea of transparency is not limited to making financial information available. Transparency also requires a firm to disclose or be open about the processes used to prepare the financial information. Furthermore, it may include offering stakeholders full information on the procedures of preparing information such as data collecting, the assumptions taken, as well as the audit and assurance reports. Overall, transparency is the willingness and commitment to offer full financial information and any related issues to financial information in an open manner to others be it external or internal stakeholders. This is all linked to disclosing some of the most withheld and protected financial information that has traditionally not been made available to the public and stakeholders. There are numerous methods that companies are required to disclose their financial information in terms of prompting transparency. Based on the different accounting standards applied by individual countries and regions, mummeries disclosure methods could enhance transparency. One example is the mandatory UK Strategic Report for large and medium-sized companies. The strategic report requires the company to disclose information on several areas that is essential for shareholders to evaluate the company. The report requires the company to offer information on development, position, and performance of the company. Moreover, it requires the company to disclose its future forecasts and the strategy for achieving its goals. The transparency report also requires disclosure of a company’s business model, governance, and director’s remuneration. This example can help to enhance transparency since not most companies would be willing to share who much their directors are compensated. This method of disclosure offers diverse requirement that can help stakeholders enhance shareholder decision making. Another example is the U.S narrative reporting that requires companies to develop a yearly report based on the Form 10-K. The reporting requires companies to offer management discussion and assessment. Furthermore, it requires companies to offer pro-forma financial statements and internal control. Overall, this disclosure enhances transparency by ensuring that management offer financial reports based on management discussions and analysis, thus offering stakeholders effective information for making decisions. In conclusion, these methods offer do help to enhance transparency through increasing the amount of information a company is required to disclose. This is based on the idea that most companies are not willing to disclose all necessary information voluntarily. I also believe that ethical issues such as fraud may lead to companies not being transparent to cover up their acts. Therefore, developing mandatory requirements and specifying the type of information to disclose is important to ensure effective transparency. Countries where there are no mandatory disclosure requirements face increased fraud and lack of proper information for making decisions. Therefore, mandatory disclosure methods are an effective way of enhancing transparency as an overall company strategy and requirement. Segmental Reporting According to Bragg (2010), segmental reporting is admission of a company’s financial information relating to its main components through various business lines. This means that only the operating segments of the business are disclosed in the financial reports. Segmented reporting is meant to offer information to creditors and potential investors on the financial position and results for the main operating business units of the firm (Bragg 2010). This information makes it easier for informed decision-making. Segmented reporting is only meant for publicly-traded companies. A comparison of BP plc (2014) and Sinopec (2012) reporting can help to better understand segmental reporting. BP segmental reporting is focused on offering financial information for different business units separately. The company begins by offering consolidated financial statements of the BP Group as a whole. BP creates a separate section for its other business units including oil and natural gas financial statements, and the parent company financial statements (BP 2012). However, for Sinopec, the company offers financial statements in a combined manner but separates of all the financial contents for the Group and the company (Sinopec 2012). This means that investors and creditors can evaluate the financial situation and position of the parent company as well as the group of companies. This enables investors to make decisions based on the information for both business units of the company. The same case applies to BP where information about different business units is offered on separate areas. One of the main similarities of the both annual reports is that they offer three crucial components in their segmental reporting. Both BP and Sinopec provide the revenue or how each business unit performed in terms of revenue (BP 2012). The companies provide revenue information on the numerous business units. Moreover, both companies offer information on profit and loss on each business unit. This information is essential to evaluate how each business unit is performing to identify potential risks and opportunities for investment. Additionally, the BP and Sinopec also illustrated the asset test. For instance, Sinopec offers the losses, income, and tax expenditure for the company and the group (Sinopec 2012). Another similarity is the reconciliation of financial information through impartment, amortization, and depreciation of assets. Both BP and Sinopec offer information on these areas illustrating the significance and usefulness of segmental reporting. In conclusion, the idea behind segmental reporting is complex especially for big businesses such as BP and Sinopec. Nonetheless, the information provided in segmental reporting is important for ensuring that stakeholders can easily deduce financial information for separate business units. Moreover, segmental reporting ensures that large businesses do not lose track of their mai9n operating units. Generating such information in segmental reporting also helps get a clear picture of the financial position and situation of the company, thus enhancing decision making and strategy formulation. References BP, 2012. Annual Report and Form 20-F 2014, available at: bp.com/annualreport. Bragg, SM 2010, The Ultimate Accountants' Reference : Including GAAP, IRS And SEC Regulations, Leases, And More, n.p.: Hoboken, NJ, ECONIS. Roberts, C, Weetman, P, & Gordon, P 2008, International Corporate Reporting : A Comparative Approach, n.p.: Harlow. Sinopec, 2012, Annual Report and Accounts. CHINA PETROLEUM & CHEMICAL CORPORATION. Tarca, A 2012, The case for global accounting standards: Arguments and evidence. IFRS Foundation. Available at: [accessed 3 Dec. 2015]. Read More