Financial Reporting Standards Setting - Coursework Example

?Table of Contents Introduction 2 Standard Setting 2 Rules vs. Principles 4 Global Standardization 6 Markets 8 Conclusion 9 References 11 Financial Reporting Standards Introduction Financial reporting standards are the principles designed from International Accounting Standard Board and American Institute of CPAs so as to attain symmetry in the accounting standards around the world in order to facilitate the user. The accounting standards are however regulated in every country differently as in some these are set as rules whereas in some these are treated as principles. The accounting standards are aimed to form symmetry and harmony in the accounting treatments around the globe but there are restrictions so as to the extent of legislation. International accounting standards are the principles and the legislations and regulations implied by the local governments are the rules that needs to be followed and thus the symmetry of reporting around the world depends upon the adoption of the accounting standards in the regulations. Financial reporting are the highest regulated activity of business but due to the regulatory differences as to the extent of adoption of accounting standards the laxities provided in the reporting standards high profile corporates collapse, although the regulations in the financial reporting but there is much room available for development as due to the modern business techniques the regulations of financial reporting should be regulated accordingly besides the fact that the reporting base provided in the accounting standards are strong enough to maintain reporting symmetry. Standard Setting The international accounting standards are made in order to harmonize the financial reporting around the globe in order to facilitate the user so the comparisons can be done. There are several bodies involved in the standard setting and their implication. International Accounting Standard Board is the main body where the standards formed and issued and in United States the American institute of CPAs. Exposure draft is issued based upon the issue arising in the financial reporting and the comments are taken upon the arose issue so responses from the different sectors of the businesses around the world can be taken and considered in order to get the involvement from different perspectives. The exposure draft is issued for a limited period and then it is considered by the experts and amended as per the needs and suggestions made by the experts around the globe. After the finalization of the exposure draft the accounting standard is formed and issued. After the issuance of the accounting standard the standard interpretation committee issues the interpretation regarding the accounting the standards and how the accounting standard deals with the different aspects of financial reporting. Whereas in United States the USGAAPs are issued to coincide with the international accounting standards so as to satisfy the uniformity in the accounting treatments around the globe. The accounting standards formed are based upon same basic concept and there is much less chances of conflict between the accounting standards and same is the case with the USGAAPs. However the two major bodies of setting accounting standards cannot implement the accounting implication around the world as the accounting standards are modified around the world varying country to country as per their legal requirement. The basis of accounting treatments is same but mostly the calculation and presentation is different so as to comfort the local reporting requirements. This brings the differentiation in the financial reporting as the reporting requirements in each country are not same. Thus the regulations in the reporting standards must be made strong enough so as to follow the required procedure in financial reporting and minimize the differences interstates so as to affirm the harmonization in the accounting treatments. Where the conflict between the accounting standard and local regulation arise the prevailing treatment is done as per the local legislation thus efforts are made to set the standards in such a way that covers the issues arising in whole world and maximum interference from the experts around the globe is taken. Rules vs. Principles Accounting standards are made with the aim of making financial reporting around the globe symmetrical and identical so as the user of the financial reports can properly benefit from the reports and can understand it better. However the accounting standards around the globe are identical but the implementation is based upon the acceptability of the accounting standards which vary country to country. The accounting standards are principles and not rules that can be followed in order to enhance the standard of reporting. International Financial Reporting Standards are principle based approach and thus the implication of which are not necessarily regulated and this offers much relaxations in various treatments. However the United States Generally Accepted Accounting Treatments are the rules based approach and there is not much relaxation and adoption relaxations. United States Generally Accepted Accounting Principles and IFRSs are the two basic reporting providing bodies and steps are taken in order to bring harmony in the financial reporting. IFRS are principle based and USGAAPs are ruled based. IFRSs are the widely accepted techniques of financial reporting and thus being the principles based approach it is accepted to a certain level in every part. There is room for acceptability in IFRSs and thus the adoption level of the IFRSs demonstrate that how much differential be there in the reporting around the globe. However the principles are very much detail and proper guidelines are provided in every IFRS document beside the fact that in accordance to the modern business techniques and complex transactions there is much room for development and it is continuously under development as the accounting treatments are modified and updated according to the requirements and arising issues but are based on same principles. There are flaws in both of the approaches whether the country adopts the accounting standards as rules or as principles. The managers find somehow the exceptions and loopholes as to the extent to validate the illegitimate and wrong treatments so as to satisfy the reporting requirement and thus lead to the corporate failures. The accounting treatments allow the corporates to record and recognize the transactions based upon many procedures and evidences whether rule based or principles managers find the conditions that satisfy the reporting standard but violates the ongoing assumptions of the company and thus leading them to failure. Rules bases approach is the strict approach to the financial reporting where the conditions are set and are needed to be satisfied so as to adopt the accounting treatments and financial reporting. In rule based approach managers just try to satisfy the conditions so as to satisfy the purpose of financial reporting. In principle based approach there is room for the level of adoption and there are no such set conditions to as the adoption of the accounting standards. IFRSs provide the principles that need to be followed so as to provide the accounting treatments and financial reports and provide guidelines to fulfill the purpose of financial reporting. The principles are adopted to a certain level as the situations change and the demand is changed. The adoption of the accounting standards is dependent upon the company but the maximum adoption helps to provide the true and fair view of the financial health of the company but there are certain conditions and circumstances where the company cannot fully adopt the accounting standards. In these circumstances there are the complex business transactions upon which standards are not yet made or is under development thus in these cases IFRSs provide bases of accounting treatments which needs to be followed in order to satisfy the financial reporting as the bases provided are strong and sound thus the managers help themselves in managing the complex transactions and not to conflict with the accounting treatments. Principles based approach is much more of a lenient situation where the non-adoption does not creates any legal issues but the following of which is beneficial for the company and thus it encourages the managers to report truly and fairly and not just to satisfy the legal requirements thus enhances the motivation between the managers (Nisbett & Aamer, 2007). Global Standardization Financial reporting is the highly regulated activity of the businesses. The adoption of the accounting treatments whether as rules or as principles shall lead to the symmetrical financial reporting which shall be highly beneficial for the companies operating internationally as they would not have to follow different accounting treatments according to their places of operations and thus minimizing their cost of preparation of financial statements (Ann, 2012). The world is going global and thus there are much barriers removed and/or minimized in for businesses so they could expand their operations worldwide. Thus the need of symmetrical financial reporting standards are required so as to benefit the businesses and other users as well. In the process of creating the accounting standards to be globally accepted there are many steps taken and adopted which are beneficial and in some circumstances there are loopholes where the managers find loopholes in the reporting requirements so they could get personal benefit from them. The accounting standards are much developed in the recent years but still there are developments going on in this field as the business transactions around the globe varies and so do their complexities. With the aim of providing globalized accounting standards there are some deficiencies where the basic accounting treatment is provided but the judgment is set upon the managers so as how they seem it fit. Thus the management involvement is required in many circumstances so the legibility of the managers comes to test and this gives rise to the corporate failures as the managers’ capabilities and intentions are tested. The globalization of the businesses have created many of the circumstances where the adoption of the accounting standards and regulating the financial reporting standards have gone complex and difficult. The complexities in the accounting treatments with regards to the business transactions around the world is making in time consuming and difficult for the accounting standards to bring harmonization in the financial reporting as the development in the reporting standards is delayed with regards to the complexities in the transactions. The development in the accounting treatments is developed with the intervention from the accounting experts around the world and the complexities in the accounting treatments are discussed by means of exposure drafts. Companies that are operational when faced with such transactions creates procedures and accounting treatments as they seem fit according to the situation and the basis provided by the reporting standards considering the transparency, true and fair view of the financial statements. Situations lead to the corporate failures where the accounting treatments are not provided and management use their own procedure and the applied procedure is not successful. The adoption of the accounting treatments lead to the ambiguity of the accounting treatments and regulations in the financial reporting as the regulations are set as per the local regulations. The adoption level in each country is different and thus the regulation in the financial reporting lead to corporate failures. In the Islamic economies such as United Arab Emirates the adoption of the financial reporting standards is limited to the extent of Islamic rules and so do their accounting regulations so the regulations are to an extent very much controlled as to the extent of accounting treatments in alliance with the Islamic rules (Amged, 2011). For the companies that are operating globally it is very much time consuming in order to prepare the financial statements according to the global reporting standards as to the extent of the adoption of the financial reporting standards and prepare their accounts accordingly which is very much time consuming and costly. The regulations in different economies of the world regarding the financial reporting is strong enough and they have imposed regulations upon the companies operating in their economies and the international companies operating in their economies are required to follow and the financial reports are audited in accordance with the adoption and application of the financial reporting standards so as to affirm and confirm the accounting standards in their economies. Markets The regulations in the different markets of the world regarding the financial reporting is differently adopted as the market is not involved in regulating the financial reporting standards and in majority of the markets of the economies the adoption of the international accounting standards are required to be adopted by law. The legal restriction in the adoption of the reporting standards is a major step towards the harmonization of the accounting treatments around the world and thus the regulation is enhanced. Companies that are legally required to adopt the IFRSs are required to issue the audited financial statements and thus the audit of their accounts is done in which it is affirmed that to what level and to what extent the adoption of the international accounting standards are followed and hence the regulation upon the accounting standards are getting strong (Yuan & Xijia, 2008). The regulation of the adoption of the financial reporting differ according to the markets and hence the requirements of the companies operating in various markets are required to follow their respective financial reporting regulations. the adherence to the financial reporting standard result in the strengthening of the regulations regarding financial reporting as the requirement legally apply to the companies operating in those markets and thus the regulations are being followed. The regulations in the markets are strong enough as the breach of the legal requirement leads to penalty and thus the adoption and application of the accounting standards are properly operated and carried upon. Related party transactions are the complex treatments which can be easily manipulated in order to window dress the financial reporting. The regulations regarding the financial reporting does not allow such preparations and thus the regulations must be strong enough to adhere to the restrictions and reporting regulations. Conclusion The regulations regarding the international financial reporting standards are strong enough in order to prevent the manipulation of the financial reporting. However the accounting treatments that are complex and those upon which the accounting standards and the rules for financial reporting are not yet issued are the issues that give rise to the failure of the transparency of financial statements which is one of the main objectives of the financial reporting. The globalization of the international financial reporting standard lead to the strengthening of the regulations around the globe as per the legal requirements and the companies have to legally follow the required standards and thus removing the obstacles and hurdles in financial reporting regulations. The role of local governments and local legislation regarding the regulations of financial reporting is crucial so as to enhance the process of regulating the financial reporting by implementing and adopting the financial reporting standards. It is required at a global level to take initiatives towards the strengthening of the financial reporting standards besides the fact that the regulation is already implemented but to a limited extent. IFRSs are the principles that need to be followed in order to benefit the company and the user in understanding, interpreting and comparing the financial reports of the companies as the world is moving towards globalization at a rapid pace. References Amged, A. E. R., 2011. CHALLENGES OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) IN THE ISLAMIC ACCOUNTING WORLD, CASE OF MIDDLE EASTERN COUNTRIES. Scientific Bulletin – Economic Sciences, 8(14), pp. 1-6. Ann, T., 2012. The Case for Global Accounting Standards: Arguments and Evidence. Academic Fellow - Research, IFRS Foundation, 1(1), pp. 10-20. Nisbett, A. V. & Aamer, S., 2007. Accounting Scandals: Does “Rules vs. Principles” Matter?. Tennessee CPA Journal, 1(1), pp. 10-12. Yuan, D. & Xijia, S., 2008. Implementation of IFRS in a regulated market. J. Account. Public Policy, 27(1), p. 474–479. Read More