Globalization of Accounting Standards - Assignment Example

Insert Title: Name: Institution: Instructor: Module: 09TH MAY, 2009 Table of content page Executive summary … … … … … … … 3 Part a: Advantages of globalization of accounting standards … … 3 Control of business … … … … … … 3 Investment decision … … … … … … 4 Increased revenue … … … … … … 4 Comparability … … … … … … 5 Automated accounting process … … … … 5 Disadvantages of globalization of accounting standards … … 6 Taking undue advantage … … … … … 6 Political disadvantage … … … … … 6 Liquidity effect … … … … … 6 Accounting language … … … … … 6 Nationalism … … … … … 7 Part b: Financial statements presentation … … … … 7 Inventory … … … … … 9 Intangible assets … … … … … 9 Summary … … … … … 10 References … … … … … 11 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 a Advantages of global accounting standards Control of business activities The 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 decision Investors 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 revenue The 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. Comparability Global accounting standards allow comparability of the financial reports of different companies from different countries. Companies from different countries are able to use the same accounting practice to prepare financial reports and this will make comparability of financial reports easier. Globalization of the financial standards puts every company internationally on the same level in respect to preparing of financial statement. Domestic companies are able to present their financial reports on the same level as the international organization. Companies with subsidiaries on different countries will be able to prepare financial reports using the global standards that are well understood by all countries. Companies are also encouraged to ensure consistency which will influence the comparability of the financial reports. Using the international Financial Reporting Standards, companies are required to adhere to consistency while preparing their reports. Consistency helps in the comparability of information of different companies from different countries. Automating accounting process The use of international accounting standards has made many companies automate financial management processes. Automated systems help especially in changing accounting environment. It helps in compiling the accounting figures resulting in accurate and reliable information. Disadvantages of globalization of accounting standards Taking of undue advantage Companies are likely to take undue advantage due to fewer rules in the International Financial Reporting Standards. The gaps in guidance are most likely to be filled in by the SEC which means that some methods of implementation of International Financial Reporting Standards permitted by regulators in other states may not be available in others. Some other countries may feel compelled to pursue the SEC lead. Political disadvantage International Financial Reporting Standards do not allow Last in First Out method of evaluation. Most companies in the US use the LIFO method of evaluation for inventories and it will be politically difficult to eliminate this method of inventory evaluation. Liquidity effects The liquidity consequences for the compulsory adopters are smaller in states that have less difference between the local Generally Accepted Accounting Principles and International Financial Reporting Standards. Allowing International Financial Reporting Standards will bring small capital market benefits to countries. Accounting language The cost of adopting a global accounting language should not be considered to be high. Studies show that the adoption of International Financial Reporting Standards has stimulated the procedure of financial reporting on international basis. The advantage of union of global accounting is being debated by different countries and how the adoption of the global accounting affects accounting of companies. Nationalism The key goal of global reporting change may be hard to achieve. It will be difficult for some companies to adopt International Financial Reporting Standards. For example the U.S is still using Generally Accepted Accounting Principles for measurement and this means that most countries may resist the adoption of the International Financial Reporting Standards. Several countries consider that U.S. Generally Accepted Accounting Principles as an attempted and right standard. Several companies have requested the regulators to stick with Generally Accepted Accounting Principles. Other companies are faced with the issue of whether to adopt or not the IFRS due to some problems. Some would imagine policy and authorities would alter bearing as well, no body is certain about that. It will be hard for companies to convert if there are no incentives for them to prepare the statements using the International Financial Reporting Standards. The decision to implement the International Financial Reporting Standards is a right idea as it will help create interest in the economy. Part b The conversion of the US GAAP to IFRS has raised many practical accounting changes and many people using the accounting standards may get confused. Although the US and international standards have differences they have similar principles and conceptual framework. Financial statements presentation similarities For both U.S GAAP and IFRS the financial statements prepared are balance sheet, income statement, profit and loss account, cash flow statement and note accompanying the financial statements. Framework for both U.S GAAP and IFRS requires that the financial statements be prepared on accrual basis of accounting apart from the cash flow statement. They also require companies to consider materiality and consistency when preparing financial statements. Financial statements presentation differences The US GAAP and IFRS have different concepts concerning the financial periods. US GAAP requires that public companies must follow the SEC rules and present balance sheet for the most recent two years while IFRS requires that relative information ought to be revealed in respect of the preceding periods for all amounts accounted in the financial statements. Concerning the layout of the balance sheet and income statement, US GAAP has no layout for preparation of the balance sheet and the income statement however public companies are required to follow the requirements in the regulation while the IFRS has a minimum items to be include in the balance sheet and in the income statement though it has no prescribed layout. Under the US GAAP covenant violating debts are presented as non-current if a lender agreement to relinquish the dishonored item exists earlier to issuance of the financial statements while under IFRS this debt must be presented as current unless the lender agreement was arrived at prior to the balance sheet date. Under the US GAAP overdue taxes are presented as current or non-current depending on the character of the associated asset or liability while under IFRS deferred taxes are presented as non-current. Under US GAAP companies are required by SEC to present expenses based on function while IFRS requires entities to present expenses based on either function or nature. Inventory Similarities Both frameworks identify inventory as assets kept for sale in the ordinary course of business. The cost for inventory for both the frameworks comprises direct expenses and allocable overhead and selling costs are excluded. Difference Under US GAAP LIFO method of evaluation is accepted and constant formula for inventory is not necessary while under IFRS LIFO is not accepted and an equal cost formula must be applied for all similar inventory items. Intangible assets similarities Both frameworks require that the amortization of the intangible assets be done throughout their useful life. If there is no probable limit to the period over which an intangible asset is anticipated to generate net cash inflows to the entity, the useful life is considered to be indefinite and the asset is not amortized. Amortization of good will is not allowed. Difference Under the IFRS development cost are exploited once technical and economic possibility of a project can be established in agreement with precise criterion while under US GAAP development cost outlaid as incurred unless addressed by a separate standard Summary Companies that have adopted the international accounting are larger and have more foreign revenue as compared to those that haven’t adopted the international accounting standards (Glautier, et al.2001p.42). The way international standards were applied in the different country was based on institutional framework in each country. Countries that adopted the international accounting standards include Germany, France and Japan. References Chua, WF, & Taylor, S L. 2008. The rise and rise of IFRS: an examination of IFRS diffusion. Journal of Accounting and Public Policy 27, pp. 462-473. Connolly, C, 2008. International Financial Accounting and Reporting. Ireland: Institute of Chartered Accountants, p.28 Deegan, C, & Unerman, J. 2007. Financial Accounting Theory. European version: McGraw-Hill, p.54 Schroeder, RG & Clark, 1993.M, Accounting Theory. UK: Wiley, p.20 Riahi-Belkaoui, A 2004. Accounting theory. Europe: Cengage learning EMEA Ronald Oxford University Press, M, 1997. Financial Reporting in the Pacific Asia Region: World Scientific, p. 109 Hendriksen, ES 1970. Accounting Theory. Asia: R. D. Irwin, p. 98 Melville, A. 2008. International Financial Reporting. New Jersey: Prentice Hall, p.202 Greuning, HV, 2006. International Financial Reporting Standards. Australia: World Bank Publications, p. 49 Wolk, BA, Wolk, HI & Tearney, MG 1997. Accounting Theory. United States: South-Western Pub, p.120 Glautier, M. W. E. & Underdown, B, 2001. Accounting Theory and Practice – Financial. New Jersey: Times Prentice Hall, p.42 Read More