International Corporate Reporting Issues - Assignment Example

International Corporate Reporting Issues Table of Contents International Corporate Reporting Issues 1 Table of Contents 1 An Overview of US GAAP Standards 2 General Influencing Factors in US Accounting Literature 3 Barriers to Adoption of International Accounting Standards 7 Comparative Study 8 Conclusion 12 Reference 13 Bibliography 16 An Overview of International Accounting Standards “Accounting provides useful information to decision makers, thus as the business environment has changed so have the accounting standards that govern the presentation and disclosure of information. International Accounting Standards are central to this concept” (Sawani, n.d.). Starting in 1973 until the year 2000, the IASC introduced the International Accounting Standards. In the year 2001, the International Accounting Standard Board replaced IASC (Deloitte, 2010). Since that time, a number of International Accounting Standards have been amended. The board has proposed bringing in amendments with some new International Financial Reporting Standards replacing the IASs. In this segment a quick overview of the IASs is provided. IAS 1 deals with financial statement presentation. The objective of this standard is to frame the foundation for the presentation of financial statements. The standard is to ensure the compatibility with the company’s financial performance in previous years as well as with that of its competitors. IAS 2 deals with the accounting treatment for inventories (Deloitte, 2010). IAS 3 was originally issued in the year 1976 and was effective from the very next year. The standard deals with the preparation and presentation of consolidated financial statements. IAS 4, IAS 7 and IAS 8 deal with depreciation accounting, cash flow statements and accounting policies. IAS 5 gives a framework to present the information to be disclosed in financial statements. There are some more IASs dealing with a number of accounting and reporting frameworks. An Overview of US GAAP Standards US GAAP is the framework that offers Generally Accepted Accounting Principles, which are used by US organisations or the companies listed at Wall Street. This set of standards is developed by the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants. The framework is a combination of authoritative standards introduced by the responsible authorities, as well as the accepted ways to carry out accounting and reporting activities. These standards are framed up without any input from other regions rather than the US. In US GAAP, statement 1 deals with the disclosure of foreign currency translation information. Statement 2 offers a framework to account for Research and Development costs. Some of these statements are the amendments of Accounting Principles Board (APB) opinions. For instance, statement no. 3 is an amendment of APB opinion no. 28 which deals with reporting accounting changes in interim financial statements (FASB, n.d.). These accounting standards (APB opinions) were issued by the Accounting Principles Board, formed by the American Institute of CPAs (AICPA) (Accountinginfo, n.d.). General Influencing Factors in US Accounting Literature The key objectives of accounting standards are identification, measurement and reporting of financial information of the organisational entities to the interested stakeholders. Financial accounting is a process culminating in the preparation of the financial reports of the organisations. These are done for the use of both the internal and external stakeholders. These financial statements include the balance sheet, the income statement, and the statement of the owner’s equity and cash flow statement. Moreover, reporting the assets and expenses and other disclosures are also pretty significant in financial accounting and reporting. There are a number of factors which have been influential in accounting literature. Since the inception of accounting standards, political factors have been quite influential in the development of financial accounting standards in any region. The adoption or non adoption of the international accounting standards may be at discretion of the strong political and business entities. The most significant source of force to influence the development of accounting standards is user groups. These groups include the parties more affected by accounting standards, rules and regulations. “Accounting standards are as much a product of political action as they are of careful logic or empirical findings” (Wiley, 2002, p.14). This statement proves the intensity of the political influence on the framing of accounting standards in any region. These groups of stakeholders may like to account or report some specific items in a specific way, or they may like to have disclosure of some specific items. In such a situation, they would fight hard to get these done. They know that the best way to influence these standards is to participate in the framing of the same, or to try to influence or persuade the authority responsible for the formulation of the standards, amendment of the old ones and development of the new rules and regulations. In the US, there are many authoritative bodies responsible for the formulation and development of the generally accepted financial standards; FASB is the significant and major contributor in this development. Undoubtedly, the board would have to face an intensive amount of pressure and efforts to incorporate and influence the changes in the present standards and development of the new ones. Moreover, the situation gets complicated with the involvement of two parties, where one party wants to incorporate the changes quickly and decisively, while the other groups would like to see the changes move at a much slower pace. It cannot be denied that in the real world we all are exposed to politics. Establishment of standards is also a part of this real world and thus, cannot escape political pressure. Investors also can pay enough attention to the accounting changes if those changes incorporate enough variation in the profitability. For instance, changes in the accounting and reporting of goodwill of an organisation can affect the investors. Prior to the changes being incorporated, goodwill was required to charge the same against revenues over a time period. According to the new rules, organisations are not required to write off this cost on a systematic basis. The impact of this way of accounting can impact on the bottom line of a number of organisations. For instance, due to no goodwill amortization, the estimation of the increase in the income of International Paper increased by 21 percent (Raiborn & Cecily, 2003). Accounting fraud, or the failure of accountants to fulfil the expectations of the stakeholders has always been quite influential when it comes to incorporating changes such as bringing in new amendments or new regulations. Accounting scandals in companies like Enron, Xerox, WorldCom, Cedant, Sunbeam and Rite Aid have attracted the attention of political as well as financial authorities. In the wake of incidents, in the year 2002, a new legislation named the Sarbanes Oxley Act was enacted to increase the resources for the Security Exchange Commission (SEC) to combat fraudulence and curb out poor reporting practices. This shows how different fraudulent activities have emerged as influential factors to shape up the accounting standards in United States. The commission has also increased its efforts by approving new auditor independence rules and introducing materiality guidelines for reporting of financial data. According to the rules, the auditor partner is required to rotate every five years. Added to this, the Sarbanes Oxley Act also incorporated changes in the institutional structure of the accounting profession. Undoubtedly, the act has enforced and established auditing, quality control and independent standards and rules. Economic consequences always have an influential role in the formulation and development of financial accounting rules and regulations. In this context it refers to the impact of accounting reports on the wealth position of the issuers as well as of the users of the information from financial statements and the decision making behaviour emerging from the same. The emerging behavioural changes among the users of financial information can have significant changes with regards their perspective of the enterprises. The financial performance of the organisations can be significantly affected by their future decisions. However, it would not be wrong to say that the majority of the changes have come due to the fraudulent activities in the accounting and reporting of financial information. According to the Sarbanes Oxley act, CEOs and CFOs must not include bonuses or profits when there is an accounting restatement. The company’s financial statements are required to be certified as accurate and complete by the CEOs and CFOs of the organisations. The audit committee must consist of independent members and the members are required to be of excellent financial expertise. A set of ethical codes must be in place for senior officers in the accounting and finance department (Wiley, 2002). Ethics is another important factor when shaping up the financial accounting standards. As business is getting more competitive day by day, concentration on maximisation of the bottom line, and stress on short term results have put the accountants in an environment of conflict and pressure. These pressures sometimes put the accountants in a situation where technical expertise may not be enough to give them the right answer to their questions. The questions like ‘what should be done’ cannot be answered by simply following the GAAP rules and hence, doing the right thing and making the right decision is not always easy. As a result, ethical considerations are a significant part of the formulation and development of financial accounting standards in United States. Adding to all of these factors, compliance with the international accounting standards is also considered while formulating new developments in standards and incorporating the amendments on the existing ones. In any country, if the accounting standard is more like the Global standards, it would be easier to incorporate the international accounting standards across that region; Else it can be tougher for any country to replace the accounting standards with the international ones. It can be said that with the changing environment, continual revision of the financial accounting standards can bring in more efficiency with regards to the standards and curb out the deficiencies in the existing rules and regulations. Barriers to Adoption of International Accounting Standards A number of countries have recognised and realised the requirement to introduce global standards meeting the accounting and reporting requirements of the financial information. As a consequence, in the year 1973, the International Accounting Standards Committee (IASC) was formed. In the same year, FASB was established to narrow down the areas of divergence between the accounting and financial standards of different countries. The objective of the establishment of standard setting by IASC is to work generally for the enhancement and harmonisation of accounting rules and regulations, standards and procedures related to the presentation and reporting of financial information. However, eliminating the difference is not an easy task. The objectives of financial reporting in the United States are quite different from that in the other countries. The structures of institutions are not comparable and strong national tendencies are also omnipresent as the barrier to adopting the international accounting standards in the United States. Since the inception of the IASC, there have been many changes, including the inception of IASB with the restructure of the IASC. The IASB has a structure which is quite similar to the structure of the FASB. Moreover, it cannot be denied that the United States has a major voice in the development of international accounting standards. As a consequence, there are enough similarities between the IASB and US based accounting standards. In most of the countries, the adoption of IFRSs would demand a good amount of significant changes in infrastructure. Investment companies may face unique issues as there would be underlying differences in the accounting for certain holdings under the International Financial Reporting Standards. The barriers and challenges to adopt the International Accounting Standards would differ from industry to industry. Apart from that, two significant factors such as companies operating in the industry and the earlier accounting choices of the issuers may also emerge as the barrier to adopt the global standards. In the transition to the International Accounting Standards, US organisations will be required to consider the probable barrier presented by other contractual and financial requirements based on US GAAP. Dual financial reporting systems can create confusion and incorporate conflicts in the accounting and reporting activities. Other barriers to adopting the International Accounting standards are mainly related to cost and education (Sawani, n.d.). The conversion experience in Asia, Australia and Europe reflected that the implementation process takes into account more time and resources than was anticipated (PWC, n.d.). The situation has led a number of companies to rush, risk mistakes or outsource more work than is necessary. This can emerge as a hindrance to attaining the required knowledge to perform day to day operations. Comparative Study In the year 1939, American Institute of Accountants (AIA) formed the committee on Accounting Procedure (CAP). The Committee issued around 51 Accounting Research Bulletins (ARB). In the year 1957, American Institute of Accountants (AIA) was renamed as American Institute of Certified Public Accountants (AICPA). In the year 1959, AICPA formed the Accounting Principles Board (APB), which issued 31 APB opinions. In the year 1973, Financial Accounting Standard Board was formed. The board issued 168 statements of Financial Accounting Standards (Accountinginfo, n.d.). This segment presents a comparative analysis of accounting pronouncements under US GAAP and IAS. According to US GAAP, accounting changes are defined as the changes in an accounting principle, an accounting estimation and the reporting enterprise. The correction of the error in the financial statements, issued earlier, is not deemed to be an accounting change. The US GAAP can be assumed to be more rule based standards with specific application guidance. As per the International Accounting Standards, “a change in the accounting policy is treated retrospectively by restating all prior periods presented and adjusting opening retained earning” (RBI, 2000). International Accounting standards are more principle based standards with limited application guidance (DiPiazza, 2006). IAS 1 offers a framework to present the financial statement. According to the IFRS, specific line items are required to report the financial information. US GAAP introduced certain standards which require specific presentation of certain items. The public organisations are required to comply in line with the SEC rules and regulations, demanding specific line items (Deloitte, 2007). The standard encourages the comparative analysis of the entity’s present performance with the performance in the earlier periods as well as a comparative analysis of the entity’s performance with that of its competitors. According to the international standards, a one year comparative analysis of the financial information is required. On the contrary, US GAAP does not have any specific requirement to present the comparative analysis. At least one year’s comparative analysis of the financial information is required. Public organisations are subject to the SEC rules and regulations, demanding two years comparative financial information for income statements, statements of shareholders’ equity and cash flows. According to the IAS, comprehensive income can be presented as one separate financial statement or may be reported in the statement of the changes in the shareholders’ equity. This is also true under US GAAP. Adding to it, the comprehensive income can be accounted and reported with the income statement. This standard permits departure from a standard when the compliance is misleading. This action is permitted in the extremely rare cases to present a fair picture with specific disclosures. However, this departure is not directly addressed under US GAAP. Despite this as per GAAP 203, the auditors may allow the companies an override if applying a certain GAAP rule seems to mislead the financial statements. IAS 1 has also offered a framework on classification of liabilities on refinancing. As per the rule, the liabilities are accounted as non-current if refinancing is completed before the balance sheet date. Under the GAAP, the liabilities are accounted as non-current if refinancing is completed before the issuance date of the financial statements. IAS has also provided a framework to classify the liabilities due on demand due to violation of debt covenant. As per the International Accounting Standards, the liabilities would be accounted as non-current if the lender has granted a 12 month waiver before the balance sheet dates. According to GAAP, the liabilities are assumed to be non-current if the lender has granted a waiver for a period greater than one year or operating cycle. The period must be before the issuance of the financial statements. There are a number of differences between the US GAAP and International Accounting Standards. International Accounting Standards do not permit the use of allowing the tax payers to postpone the inflation related increases in the inventory values. However, this method is generally used by US companies for financial reporting due to a tax conformity requirement as per the US Internal Revenue Code. There are even differences in the process of revenue recognition, specifically for the service contracts, multiple element arrangements, construction contracts, customer loyalty programs, real estate development and software. Generally, under the consolidation policy of International Accounting Standards, consolidation is required for all controlled entities where US GAAP does not demand encompassing of all the organisations. International Accounting Standards require the shares, which are determined to be redeemable by shareholders, to be reported as the liabilities. On the contrary, US GAAP includes those in equity (Jermakowicz & Epstein, 2008). “The switch from LIFO to FIFO, or to moving average cost, another permissible inventory valuation method under IFRS, has other counterintuitive effects. The change typically results in higher-ending inventory, lower COGS, and higher earnings per share (EPS) in a rising cost environment” (White, n.d., p.2). One may think that higher EPS would refer to higher valuations for the organisations creating these changes. The underlying effect of the companies can have opposite effect with higher cash payments for taxes owed. The companies, changing their policy to FIFO, may suffer from lower valuation as higher cash paid for the tax liabilities would mean less amount of cash for working capital, advertising and promotional activities. These impacts on the firm value and company competitiveness would refer that the companies, employing LIFO, are reluctant to adopt IFRS. Overall, US GAAP differs from the International Accounting Standards; however, both of them move towards the fulfilment of financial and accounting requirements of the companies in the specific regions Conclusion The objectives of IASs are definitely to align fair accounting standards across the globe. The US has been a significant contributor to the framing and development of global accounting standards. As of now, there are differences among the IASs and US GAAP rules. One significant difference is that US GAAP norms are ‘rule based’ while IASs are ‘principle based’. The Security Exchange Commission has historically recognised the FASB as the authoritative body in American financial reporting. Although, since the year 2002, the FASB has collaborated with the IASB, some significant differences still remain the same (Oyedele, 2010). However, recent trends have revealed that US GAAP is leaning towards International Financial Reporting standards (Fogarty, n.d.). This has been in the wake of massive acceptance of the global standards by more than 100 countries. Undoubtedly, it would demand a number of changes in the existing accounting standards as well as the required infrastructures. At this time, a detailed revision of US GAAP is required to fulfil the financial and accounting requirements of all the stakeholders of the economic entities. Reference Accountinginfo. No Date. U.S. GAAP Codification of Accounting Standards. [Online]. Available at: http://accountinginfo.com/financial-accounting-standards/asc-100/105-gaap-history.htm[Accessed on December 22, 2010]. Deloitte. March, 2007. IFRSs and US GAAP. [Pdf]. Available at:http://www.iasplus.com/dttpubs/0703ifrsusgaap.pdf [Accessed on December 22, 2010]. Deloitte. 2010. Summaries of International Financial Reporting Standards. [Online]. Available at:http://www.iasplus.com/standard/ias01.htm [Accessed on December 22, 2010]. DiPiazza, A. S. September, 2006. IASB Meeting With World Standard Setters. [Pdf]. Available at: http://www.iasb.org/nr/rdonlyres/e939f826-f538-4842-9b69-3989e1ef7bc1/0/dipiazzaiasbsept252006speechfinal.pdf [Accessed on February 07, 2011]. FASB. No Date. Pre-Codification Standards. [Online]. Available at:http://www.fasb.org/st/index.shtml#fas25 [Accessed on December 22, 2010]. Fogarty, M. No Date. The Pros and Cons of Converging with International Financial Reporting Standards. [Online]. Available at: http://www.amper.com/publications/Pros-and-Cons-of-International-Financial-Reporting-Standards.asp [Accessed on December 22, 2010]. IFRS. [Pdf]. Available at: http://www.rnco.com/pdf/Journal_International_Banking_Dec08.pdf[Accessed on December 22, 2010]. Jermakowicz, K. E. & Epstein, J. B. December, 2008. Joining the world: US companies adopting Oyedele, R. March 30, 2010. Evolution of Accounting in the United States. [Online]. Available at:http://www.suite101.com/content/evolution-of-accounting-in-the-united-states-a219943 [Accessed on December 22, 2010]. PWC. No Date. Preparing your first IFRS financial statements. [Pdf]. Available at: http://www.contractualcfo.com/documents/PwC_adopting_ifrs.pdf [Accessed on February 07, 2011] Raiborn & Cecily, A. March 22, 2003. Accounting for goodwill: are we better off? [Online]. Available at: http://www.allbusiness.com/accounting/550759-1.html [Accessed on February 07, 2011]. RBI. 2000. Comparative Analysis Between US GAAP, Indian GAAP and IAS. [Pdf]. Available at:http://rbidocs.rbi.org.in/rdocs/publicationreport/pdfs/18354.pdf [Accessed on December 22, 2010]. Sawani, A. No Date. The Changing Accounting Environment: International Accounting Standards and US implementation. [Pdf]. Available at:http://www.aabri.com/manuscripts/09206.pdf [Accessed on December 22, 2010]. White, C. W. No Date. The LIFO Conundrum: Convergence of US GAAP with IFRS and Its Implications on US Company Competitiveness. [Pdf]. Available at: http://www.qfinance.com/contentFiles/QF01/g4fqn4jz/10/0/the-lifo-conundrum-convergence-of-us-gaap-with-ifrs-and-its-implications-on-us-company-competitiveness.pdf [Accessed on February 07, 2010]. Wiley. 2002. Financial Accounting and Accounting Standards. [Pdf]. Available at:http://media.wiley.com/product_data/excerpt/87/04710720/0471072087.pdf [Accessed on December 22, 2010]. Bibliography Europa. No Date. International Accounting Standards (IAS).Available at:http://europa.eu/legislation_summaries/internal_market/single_market_services/financial_services_general_framework/l26040_en.htm. Greuning, V. H. & Koen, M. 2001. International accounting standards: a practical guide. World Bank Publications. Investopedia. 2010. What is the difference between IAS and GAAP? [Online]. Available at:http://www.investopedia.com/ask/answers/05/iasvsgaap.asp. Wiley. No Date. 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