Executive summary Most business can never stay away from adopting the global accounting standards due to various advantages. The change to International Financial Reporting Standards (IFRS) from U. S. GAAP started early on 2005, with several states in the European Union adopting techniques to organize their financials in agreement with the new principles ((Deegan et al 2007 p. 54). As from 2005, various states that were preparing to change to U. S. based Generally Accepted Accounting Principles (GAAP), have altered their concentration to apply IFRS. Due to the increase in international business activities many countries has made many companies to be independent in international trade and investment. Part aAdvantages of global accounting standardsControl of business activitiesThe globalization of accounting standards helps to control the way in which businesses carry out their accounting work.
The accounting practices in business world need to be controlled due to negligence and malpractices by many companies (Chua et al. 2008 p. 466). Companies are known to meddle with financial information so that it can attract potential investors to the company to invest and provide capital requirement for the company.
For instance Shell Company, a company that provides oil worldwide was accused of overstating its oil reserves so as to draw more investment. It finally confessed to have tampered with its financial information. International accounting standards helps to evaluate the financial procedures followed by businesses and format used when publishing financial statements. Different countries have adopted accounting measures and procedure structured in the International Accounting Financial Reporting Standards to reduce discrepancies in financial analysis. It also helps to improve investment opportunities for companies and make financial data accessible. Investment decisionInvestors from different countries are able to use the financial ratios of companies listed in the Stock Exchange to make investment decisions.
Investors are able to determine the financial health of the company before they can decide whether to invest in the company or not. This is made possible because companies publish their financial reports annually and they must adhere to international accounting standard when preparing these reports. Investors will only invest in a company if they are completely certain that the investment will gain higher returns. For example the yearly report of The EMI Group, 2004 shows the current asset of the Group amounted to1107 and current liabilities 1403.5 million.
The current ratio calculated is 0.78:1.3. This current ratio suggests that the Group does not have enough short term assets to meet its short term liabilities. If stocks worth 36.4 are deducted from its current assets the outcome will be that the group has a poor debt financing capacity. The quick ratio for this case is 0.76:1.4. When investor use this ratio to determine whether to invest or not they are likely to decide not to invest in the company.
Increase revenueThe globalization of the accounting standards is likely to increase revenue for companies using the standards and will enable companies to be listed on one of the foreign stock exchange. The Generally Accepted Accounting Principles of US is the main option, but International Accounting Standards is used by several firms in Germany and a number in Japan. Those firms that are listed in the United States’ regulated markets are most likely to prefer US Generally Accepted Accounting Principles. Those companies that traded in the OTC market often select International accounting standards.