Global Accounting Standards - Myths or Reality - Assignment Example

Global accounting standards; Myths or reality? Name Course Tutor Date Question A The contemporary corporate world has undergone a drastic change in terms of financial and human resource management. This change is attributed to the process of globalization where most corporations have diversified their operations to various parts of the world. It is clear that every part of the world, there are different cultures and beliefs. Therefore, people have their rules and principles that govern them in every aspect of their life. This implies that they transfer these principles even in the art of trading where certain rules are applied in the process of financial management (Kirk, 2009, PP4). Initially, every region of the world had their accounting reporting standards that were used by the accountants in the financial recording and management of organizations (Pacter, 2014, pp5). However, due to globalization, firms from other nations have established their subsidiaries in other nations meaning that the practice of financial recording would be hard because of differences in the accounting standards available to such multinational corporation. In recent decades, the accounting professionals raised a concern that there is a need of developing a standardized international accounting standard (McGregor, 2005). This standard would be adopted by all the nations around the world so that the process of the accounting and financial record keeping is harmonized (Godfrey, & Langfield-Smith, 2005, pp8). The globalization of investments markets has led to the demand from investors for the need of developing of the international financial reporting standards. Moreover, the emergence of world markets and cross-border financing has contributed to the need for finding an international financial reporting standard (Pacter, 2014, pp5). Most nations agreed to adopt the standards although the standards still have some un-ironed issues that make other nations become reluctant in adopting these international standards. Australia is among the countries that have contemplated on whether to adopt these international standards or leave it (Ingram, 1997, pp19). All Australian accounting bodies such as; Australian accounting standards board (AASB), Australia society of certified practicing accountants (ASCPA), Institute of chartered accountants in Australia (ICAA) and other Australian professional bodies have accepted the IAS (McGregor, 2005, pp2). The majority of the Australian corporations do not seek direct way of raising foreign capital because they have good financial base. Therefore, most of them are contented with the domestic accounting standard which majorly focuses on local needs in Australia (McGregor, 2005, pp11). Nevertheless, it was realized that the policy of sticking to domestic accounting standard without considering international development could hinder timely improvement in the quality of the financial reporting (Ingram, 1997, pp22). This would again adversely affect the efficiency of the Australian capital markets as compared to the foreign capital markets. Conserving the domestic Australian standards would not enable the nation to attract capital and foreign investors (Ingram, 1997, pp22). This is because they would not be able to make sensible assessments mostly on a comparative basis. Why Australia is adopting IAS There are many reasons given by the accounting professionals in advocating the adoption of the international accounting standards (IAS). First, they argue that the existing local accounting standards are confusing and inefficient (Ingram, 1997). They state that these local standards do not give a chance for the stakeholders’ participation (Ingram, 1997, pp11). Therefore, to provide opportunities for the stakeholders to participate in the issues concerning finances of their firms, the international standards should be adopted. Secondly, they argue that there is the duplication between the Australian Accounting standards board (AASB) and the public sector accounting standard board (PSASB) (McGregor, 2005, pp7). It seems that these two boards perform the same tasks, hence more confusion (Ingram, 1997, pp11). Thus, the adoption of the IAS would solve this problem. Thirdly, the Australian accounting standards in the major capital markets around the world such as the UK and US. This situation leads to higher costs of capital for the local firms. (Godfrey, & Langfield-Smith, 2005, pp18). Finally, the AAS do not reflect contemporary business practices since these standards are very technical and prescriptive hence, causing many costs to firms (Ingram, 1997, pp11). This mess can only be eradicated by the adoption of the international financial reporting standards. Objectives of adoption of IAS in Australia One of the main objectives of AASB in adopting the international financial reporting standards (IFRS) is to have a clear and relevant policy framework in accountancy. These international standards are responsive to the dynamics in corporate world (Ingram, 1997, PP12). When this is achieved, it will enable the users to meet their needs without much burden hence improving Australian global competitiveness (Pacter, 2014, pp5). Secondly, adoption of IFRS would improve the institutional arrangements for the standards-setting procedure thus, ensuring that the procedure occur in a much responsive and efficient way (Ingram, 1997, PP12). This will enable the relevant stakeholders to participate in the affairs of the corporations as they maintain the independence of the entire process (Kirk, 2009, PP3). Lastly, adoption of the IAS would enhance a more equitable e spread of the cost burden concerning the funding the setting of the accounting standards (Ingram, 1997, PP12). This would enable those stakeholders who benefit from these accounting standards also contributes to the development of the same standards. Advantages in adopting of the IFRS Therefore, the above reasons and purpose of adopting the financial international standards shows that it is no longer a myth for Australia to adopt these standards but it is a reality. The AASB has harmonized most of the sections of the Australian accounting Standards (AAS) with those of IFRS (Albu, Nicolae Albu, & Mădălina Gîrbină, 2012, PP32). There are many advantages attributed to this move. First, there is better comparability of the local firms’ financial records and those of foreign nations’ companies (Ingram, 1997, PP17). Easy comparability would make the local firms gauge their performance to those of foreign firms. This would help in the process of bench-marking when the local companies want to strategize future performance (Shamrock, 2012, pp25). Secondly, IFRS would enable the local companies to restate their financial statements when they want to issue foreign securities. This leads to the reduction of the cost of raising capital in the foreign nations (Ingram, 1997, PP17). This comes as a result of using the same accounting principles that are recommended by the international standards. Hence, they are understandable by any accountant around the world (Bostan, Grosu, & Iancu, 2010, PP17). Besides reducing the costs, it also saves time in this process of issuing of securities in foreign lands. The third advantage adoption of IAS are is that those companies that have investments overseas, the single set of international accounting standard reduces the cost of their account conversions (Ingram, 1997, PP17). Initially, the firms that traded in foreign countries were compelled to carry out account conversion to reflect the accounting standards of the foreign nations where their subsidiaries are located (Shamrock, 2012, pp10). However, the new IAS has eliminated this process hence, promoting corporate efficiency and reduction of costs that were involved in the conversion process. Finally, IAS has enhanced more efficient formulation of the local accounting standards and promotion of their international image (Pacter, 2014, pp8). This has led to the world rankings and competitiveness of the domestic capital markets. In other words, the IAS has enabled the Australian capital markets to be recognized globally thus, becoming more competitive. Disadvantages of the adoption of IAS One of the disadvantages of IAS is that it is incapable of attaining the same level of investor protection in the current corporate world like the way the local standards protected initially. The reason behind this fact is that these international standards tend to consider the aspect of finding fair and average representation of the many existing accounting standards in the world (Shamrock, 2012, pp25). Secondly, this international standard is incapable of responding quickly on the dynamic market conditions in various markets (Ingram, 1997, PP22). Research reveals that it takes on average three years for international accounting standards committee to respond to the changing market conditions (Ingram, 1997, PP21). This delay affects the firms operating in the affected markets. Another disadvantage is that IAS has not left an opportunity for the use of alternative accounting methods. This has reduced the comparability of the financial records (Ingram, 1997, PP21). The IASC should at least allow some space in some policies where the local standards can apply. It would enable firms have a chance of carrying out the same accounting process but using different standards (Ingram, 1997, PP21). Another disadvantage is that the adoption of these IAS is quite hard and would be incomplete without the support from the domestic standards that supplements some details. This implies that underdeveloped nations that did not have good local accounting standards find it hard to adopt the IAS because of the gaps it has (Shamrock, 2012, pp13). Finally, the accounting policies underlying the IAS sometimes are inferior compared to some of the standards of the major economies such as the US and UK (Ingram, 1997, PP21). The IAS as designed in finding a balance between all the global standards, thus, adjusting the policies to fit the minor economies, leading to final inferior standards to the developed economies. Question B Steps to be taken to ensure one set of IAS For a country like Australia that is still adopting the IAS, there are several steps it has to take to ensure that IAS develops fully. The first step is that AASB should work hard in collaboration with other boards such as FASB of the US to improve the standards of IFRS. This can be done especially in areas such as convergence projects where the aspects of revenue recognition and the lease accounting (Ingram, 1997, PP23). In other words, it means that AASB should not sit back but should conduct continuous development and improvement of the IFRS to suit various capital markets around the world (Phillips, 2010, pp620). The second step is that AAASB should assist the local firms in the interpretative process of the IFRS policies and principles (Sec.gov, 2012, pp24). This means that AASB should be in a position to understand all the details found in the IFRS so that it can explain to the firm on some unclear details and advice them accordingly. The interpretation and clarification of the issues by AASB for the local firms would help them keep their financial records to the required standard; hence, IFRS would be upheld (Ingram, 1997, PP24). The third step is that AASB should actively interact with other standard boards all over the world and IASB so that they can understand the intricacies of different domestic reporting and regulatory systems (Sec.gov, 2012, pp8). This would enable them to formulate favorable policies that would be included in the IFRS and suit all the world capital markets in every part of the world (Bostan, Grosu, & Iancu, 2010, PP11). “Another step that should be taken to uphold the use of IFRS is that AASB should ensure enforcement of these standards by the practicing accountants in all the public and private companies in Australia (Sec.gov, 2012, pp10). In the process of enforcement, AASB should be strict and punish those companies that do not adhere to the IFRS requirements. Enforcement and supervision of the application of this standard would enhance consistency in the use of these international standards in Australian firms (Ingram, 1997, PP23). Another step that AASB should strike a balance in its roles of oversight the IASB and supporting the independence d of the same body (Sec.gov, 2012, pp17). It is required that IASB should be independence and should be subjected to any influence from other standards boards. Therefore, it is the responsibility of the AASB to maintain the independence of this international body as it oversees its functions (Shamrock, 2012, pp25). The final step to should ensure the use if IFRS is that AASB should fund the IASB to enable carry out its functions effectively (Ingram, 1997, PP25). ). IASB is a body that represents all standards board in the world. Therefore, it is a requirement that local standards board should fund this international body so that it delivers its duties (Phillips, 2010, pp624). When IASB is funded well, it will have enough funds that can be used in carrying out research to find better methods and favorable policies that can apply internationally in this field. Steps to be taken if IFRS is rejected As mentioned earlier, Australia is still adjusting to the international accounting standards. This means that it has not yet adopted fully. In case the stakeholders reaches a point and decide to reject this move and maintain its local standards, the AASB should take the following steps. First, AASB should formulate standards with similar objectives of those of IFRS (Sec.gov, 2012, pp12). This means that the overall objectives of the accounting process should be the same like those of IFRS even if when they appear different. This would maintain relatedness in the two standards (Carnegie, Sidaway, & West, 2013). The second step is that the AASB should study and identify the fundamental differences between the local standards and the IFRS (Sec.gov, 2012, pp14). This would enable it to inform the firms that have branches in foreign nations on how some accounting issues in the IFRS standards are handled. The third step is that AASB should guide the firms in Australia’s corporate world on the application of the local standards (Phillips, 2010, pp628). Apart from guiding, it should also supervise or enforce them in adhering to these local standards to ensure uniformity in the accounting practices (Sec.gov, 2012, pp16). Another step that should be taken by AASB is that should ensure that there is easy comparability of the accounting records within and across the jurisdiction. One of the disadvantages of rejecting international standards as mentioned earlier was that it was hard to conduct comparison (McGregor, 2005, pp21). Therefore, in this situation where Australia does not want to adopt the IFRS, comparability would be a problem to many companies. Therefore, it should provide ways on how the companies would do comparability of their financial records with those of the foreign companies that use IFRS. 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Carnegie, G, Sidaway, S, & West, B (2013). “A Chaotic Field of Practice: Financial Reporting of the Library Collections of Australia's Public Universities, 2007-2011.” Australian Academic & Research Libraries, 44, 4, pp. 195-216, Viewed 25 September 2014. Godfrey, J, & Langfield-Smith, I (2005). “Regulatory capture in the globalization of accounting standards. Environment & Planning A, 37, 11, pp. 1975-1993. Viewed 25 September 2014. Ingram, V. (1997). Accounting standards. Building international opportunities for Australian business. Accessed 25 September 2014. Retrieved from http://archive.treasury.gov.au/documents/281/PDF/full.pdf Ionel, B, & Veronica, G 2010, “Stock options review and accounting under IFRS2', Journal Of Economics & Engineering, 2, pp. 22-27. Viewed 25 September 2014. Kirk, R. (2009). IFRS: A quick reference Guide. Amsterdam; Elsevier publishers Landau, I, Mitchell, R, O'Connell, A, & Ramsay, I (2007). “Employee share ownership in Australia: theory, evidence, current practice and regulation”. UCLA Pacific Basin Law Journal. 25, 1, pp. 25-132. Viewed 25 September 2014. McGregor, W. (2005). The role of Accounting standards setters and their relationships with the IASB. Accessed 25 September 2014. Retrieved from http://www.aasb.gov.au/admin/file/content105/c9/NSSroleITC_03-05.pdf Mostafa Hasanen, S, & Mohamed Abo Talib, D (2014). “A proposed model to address convergence determinants, IFRS & FASB: measurement & disclosure of revenue recognition "the case of Egypt.” International Journal of Academic Research, 6, 3, pp. 269-285. Viewed 25 September 2014. Pacter, P. (2014). Global Accounting Standards- from vision to reality. Assessing the state of IFRS adoption, jurisdiction by jurisdiction. The CPA journal. Accessed 25 September 2014. Retrieved from http://www.ifrs.org/Alerts/Publication/Documents/2014/CPA- Journal-Global-Accounting-Standards-January-2014.pdf Phillips, LJ (2010). “The implications of IFRS on the functioning of the securities antifraud regime in the United States” Michigan Law Review, 108, 4, pp. 603-631. Viewed 25 September 2014. Sec.gov. (2012). Work plan for the consideration of incorporating international financial reporting standards into the financial reporting system for U.S Issuers. Accessed 25 September 2014. Retrieved from http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final- report.pdf Shamrock, S. (2012). IFRS and US GAAP: A comprehensive comparison. Vol. 7. New York; John Wiley &Sons Walters, K. (2004) “Standards fight-back', Brw, 26, 5, pp. 36-41. Viewed 25 September 2014. Read More