Set of Accounting Principles - Essay Example

?Principles of Accounting INTRODUCTION The commonly followed accounting principles and ments with detailed guidelines are d in the ‘Generally Accepted Accounting Principles’ (GAAP) developed by ‘Financial Accounting Standards Board’ (FASB). In this context, all the financial transactions and information of an entity are required to be analyzed and recorded in compliance with GAAP. Another set of principles under ‘International Financial Reporting Standards’ (IFRS) is developed under the principles of accounting by ‘International Accounting Standards Board’ (IASB). Recently, the standards and principles of GAAP have been transited to IFRS with the aim of having a single set of accounting principles with universal applicability. It provides the rules along with regulations in compliance with which, financial statements and reports should be prepared. The accounting standards and principles that are included in the IFRS are universally identified, which implies that every entity, on a global context, must evaluate and represent their accounting information in accordance with the determined rules and regulations of IFRS (Needles, Powers and Crosson 24-25). The essay thus intends to discuss the advantages that can be acquired from a single set of accounting principle. Moreover, the discussion henceforth reveals the disadvantages attached with multiple accounting principles on a global context. The discussion also emphasizes on detailing the accounting standards adopted by IFRS for universal applicability, further detailing the accounting principles that business units operating in United Arab Emirates (UAE) adopts. ADVANTAGES OF IFRS 3 The accounting principles and standards adopted and implemented under the GAAP form the common set of standards and principles developed for recording financial transactions and information in an appropriate manner by publicly listed companies worldwide. Additionally, ‘International Financial Reporting Standards’ (IFRS) have formulated accounting standards and principles, which are adopted as common accounting practices in all the countries. It is identified in this regard that GAAP and IFRS are two different sets in relation to accounting principles that are used in different countries. Both the GAAP and IFRS work with a common objective of guiding companies through a set of common accounting principles on a global context. The accounting principles are principally based on the notion that financial reports with common objectives act as the tool to ensure that financial information are evaluated and recorded in a transparent manner. Moreover, the management team and employees of a company entrusted with the responsibility of analyzing and preparing financial reports is likely to develop accounting reports in a simple and consistent manner. The recording of financial information under a single set of accounting principles can further facilitate in providing better information to worldwide investors along with creditors so that the stakeholders are able to acquire reliable and appropriate information (Wong, “The Trend of IFRS Conversion: What you need to know about the transition from GAAP to IFRS”). It is worth mentioning in this regard that the principles of GAAP have certain rules along with regulations that lack completeness in relation to several circumstances. In this regard, a single set of accounting principles is developed by the IASB with the objective of developing a transparent procedure of recording and communicating accounting information in order to minimize accounting frauds and misrepresentation of financial statement assisting users, such as the employees of companies, to obtain adequate in relation to the employment benefits they are entitled with. Furthermore, a single set of accounting standards and practices on a global context will facilitate business organizations of different countries to compare their financial performances in an impartial manner providing significant information about the performances of a company (Wong, “The Trend of IFRS Conversion: What you need to know about the transition from GAAP to IFRS”). Comparatively, IFRS is the based on principles with minimum guidelines making it a simple procedure of accounting information. It mainly emphasizes providing accounting principles on the basis of which financial reports and statements are to be developed. In this respect, IFRS provides appropriate ideas and principles, which are required to be depicted in the financial statements and reports of a listed company. Respectively, the accounting principles of GAAP are converted to IFRS so that a single set of accounting principles are recognized on a global context. Business entities operating on a global context will therefore be facilitated with the opportunity of developing financial reports with simplicity and appropriately. Contextually, IFRS also aims to enable stakeholders i.e. management team, creditors, employees and investors of a particular company to obtain accounting information in a detailed manner, which in turn assures the management of business entities to be able to make effective decisions (Wong, “The Trend of IFRS Conversion: What you need to know about the transition from GAAP to IFRS”). A single set of accounting principles recognized on a global context and with its universal applicability is quite likely to facilitate in maintaining better consistency. Additionally, a single set of accounting principles shall assist in developing an efficient capital market globally. In this respect, development of an efficient capital market may lower capital costs for business organizations, which shall further promote improvements in the global economic conditions. In this context, employees are likely to have better employment benefits and other development opportunities (Pounder, “How Globalization is Affecting U.S. Accountants”). There is an accounting standard in IFRS under IAS 19 i.e. ‘employee benefits’ signifying the benefits that the employees of a company will be entitled to. The employment benefits include short-term benefits like wages, paid annual leaves and salaries. Additionally, the long-term benefits include retirement benefits, jubilee benefits and other claims. The employees are likely to be receiving termination benefits (Allianz Global Investors, “IFRS Accounting of Pension Obligations”). To be noted, IFRS 3 is based on the principles of acquisition method on the basis of which, two business organizations are facilitated with the opportunity of executing their business operations under a common control. Regarding to the idea of IFRS 3, companies can be able to develop their financial reporting and statement under common accounting standards, facilitating creditors and investors among other stakeholders with adequate accounting information in relation to assets and the liabilities owned by the company. Additionally, the standards of IFRS 3 will enable business entities to develop their financial reports in a simple manner, wherein the accounting information depicted is globally recognized. Hence, the accounting information is developed with better relevance, comparability as well as reliability (IFRS Foundation, “IFRS 3 Business Combinations”). IFRS 3 also have several benefit plans which include contingent payments and incremental payments. The aforementioned benefits are offered to employees of companies as a way of forfeiting them on their employment termination (Deloitte Global Services Limited, “IFRS 3 - Continuing employment”). Therefore, it can be comprehended from the above discussion that a single set of accounting principles is more likely to improve the procedure of obtaining accounting information and develop financial statements in an appropriate manner based on stronger features of simplicity and universal applicability. DISADVANTAGES OF IFRS 3 Developing financial reporting in accordance with IFRS standards is often criticized to increase complexity for the management of business organizations in ascertaining appropriate information about their global performances. Moreover, it also pose a threat for the management of a business organization in making financial and other related decisions due to lack of adequate and appropriate accounting information about the business environmental conditions persisting in other countries. When considering the fundamental aspects of the international business environment, business organizations operating in the worldwide market segments are determined to face the challenge of communicating financial information within the global participants due to the factor that the accounting information derived from their respective accounting principles and standards will differentiate from the accounting principles adopted in other countries and thereafter contribute to perplexity and a gap among its international stakeholders. Respectively, the accounting information derived by financial analysts with the assistance of IFRS standards will increase inconsistency in financial reporting as IFRS 3 is not globally accepted to produce a uniform understanding of financial information (Nobes, “International Variations in IFRS Adoption and Practice”). The lacuna resulting from inconsistencies in following a single set of principles has also been criticized worldwide to reduce the flexibility of business entities operating in different countries and to adopt the accounting principles developed by international financial institutions, which include IASB and FASB. Additionally, the absence of IFRS accounting principles in major economies, which include China, Japan, India and Canada, may also pose immense threats for international investors. As a consequence, investors shall not be able to determine the performances and appropriateness of accounting information that are depicted by business entities operating in different countries, when formulating financial reports in their respective accounting principles. Contextually, different sets of accounting principles is also criticized to increase capital cost of firms in the global context as the firms is also likely to face ample challenges in acquiring investments from investors due to inadequate information in relation to corporate performances. Respectively, the existence of different accounting principles will reduce liquidity of capital market globally, which can result in inadequate flow of financial resources in the form of investments from foreign investors. In this context, it will adversely affect the development of economic conditions of different countries (Nobes, “International Variations in IFRS Adoption and Practice”; Pounder, “How Globalization is Affecting U.S. Accountants”). It is also identified that in absence of a single set of accounting principles will adversely affect the quality of financial reporting as such reports will not be of similar importance on a global context. Different sets of accounting principles are also likely to raise issues of misrepresentation and manipulation of financial reports and statements (Mohr, “International Financial Reporting Standards - Advantages & Disadvantages”). When concerning practical evaluations, it has been observed that business organizations, the existence of different sets of accounting principles have manipulated their financial statements with the intention of hiding financial issues that remained unidentified for a long-term period owing to the complexity challenges identified when assessing the financial statements produced in distinct manner to that being followed within the host nation. Thus, it is identified that business entities portray more revenues in their financial statements and reports to attract more investors (Hali, Leuz and Wysocki, “Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors”). The accounting standards that are adopted in the IFRS 3 will pose certain crucial impacts on the area of earning volatility. Respectively, the application of new and revised accounting standards in the IFRS will pose considerable threat for decision-makers in predicting their earnings. The revised IFRS 3 accounting standards therefore emphasizes greater control on transactions and their recordings. Additionally, the revised standards of IFRS 3 comprise a combination of different mutual along with contract and accordingly, affect the negotiation process in acquisition of deal structures. The major disadvantage of IFRS 3 is that it makes the financial statements lengthier. Moreover, changes in the standards of IFRS 3 can be accustomed in future in relation to business combination, which may affect the accounting information derived and the acquisition date finalized (PricewaterhouseCoopers, “IFRS 3 (Revised): Impact on Earnings”). INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) IFRS provides the common accounting principles, which will be universally recognizable and applicable. Business entities operating in a global context are correspondingly expected to be facilitated with the opportunity of developing their financial reports in accordance with common accounting principles. In this respect, business organizations will be able to develop financial statements and reports with better consistency along with increased reliability globally (Laxminiwas & Co., “List of International Financial Reporting Standards”). There is a list of IFRS including accounting standards developed as well as adopted by IASB as an institution, which is entrusted with the task of setting standards for IFRS. The list of 20 accounting principles has been mentioned hereunder as adopted by IASB for IFRS. Presentation of financial statements Inventories Consolidated Financial Statements Depreciation accounting Information to be disclosed in financial statements Accounting responses to changing prices Cash Flow Statements Accounting policies, changes in accounting estimates and errors Accounting for research and development activities Events after the balance sheet date Construction Contracts Income Taxes Presentation of current assets and current liabilities Segment Reporting Information reflecting the effects of changing prices Property, plant and equipment Leases Revenue Employee Benefits Accounting for government grants and disclosure of government assistance Source: (Laxminiwas & Co., “List of International Financial Reporting Standards”) The aforementioned list of 20 accounting principles is the currently issued principles and standards for IFRS among others. Correspondingly, four major accounting standards of IFRS from the listed 20 accounting principles are explained in detail hereunder: Presentation of Financial Statements. ‘Presentation of financial statements’ of IASB for IFRS signifies factors that will be required for the formulation of financial statements. It provides the foundation structure on the basis of which, financial statements are required to be developed. In this regard, the financial statements developed should include a statement of profit and loss, statement of financial position and statement of cash flow (Deloitte Global Services Limited, “Standards”). Inventories. The standard developed by IASB regarding inventories mandates companies to provide detailed information about the procedures in accordance with which, transactions of inventories are recorded. It implies that the inventories should be recorded at ‘Net Realizable Value’ (NRV), on through the application of First-In First-Out (FIFO) or any other globally known recording method (Deloitte Global Services Limited, “Standards”). Statement of Cash Flow. The standard ‘statement of cash flow’ signifies that business entities are required to develop a statement of cash flow as an important element of the financial statements. Cash flows depict the operating activities, financial activities and investing activities. It is worth mentioning in this context that cash flows are developed with the assistance of either a direct or indirect approach and the statement of cash flow is formulated on a gross basis (Deloitte Global Services Limited, “Standards”). Accounting Policies, Changes in Accounting Estimates and Errors. The standard ‘Accounting Policies, Changes in Accounting Estimates and Error’ implies that appropriate accounting policies are required to be selected and applied in order to determine changes and adopt suitable measures with the intention of rectifying the identified changes and errors (Deloitte Global Services Limited, “Standards”). FINANCIAL STANDARDS ADOPTED IN THE UAE UAE is recognized as a leading player in to the global oil industry. In order to expand it business operations in different countries, UAE has adopted IFRS as its principle set of accounting standards based on the fact that IFRS are accepted and are applied in almost every country. In this regard, the business or economic units operating in the UAE have adopted IFRS with the objective of developing appropriate accounting regulatory systems in order to mitigate fraudulent practices and manipulation in the development of financial reports. Respectively, companies in the UAE tend to adopt IFRS with the intention of attracting global investors and capital. In this context, the country, with the adoption of IFRS will be facilitated with the opportunity of developing banking sectors, real estate, international trade, tourism sectors along with manufacturing sectors (Irvine and Lucas, “The Globalization of Accounting Standards: The Case of the United Arab Emirates”). The example of two companies functioning in the UAE those have adopted the accounting standards of IFRS in the development of their financial statements are ‘Oman & Emirates Investment Holding Company SAOG and its Subsidiaries’ and ‘Abu Dhabi National Insurance Company PSC’. Oman & Emirates Investment Holding Company SAOG and its Subsidiaries. The financial statements of the company comprise statement of financial accounting, which includes the ‘unaudited condensed interim statements of comprehensive income’, the ‘statement of changes in equity’ and the ‘statement of cash flows and the interim financial statements’. The aforementioned financial statements are presented by the company to the stock exchange i.e. Abu Dhabi Securities Exchange (ADX). In this respect, it can be comprehended that the company prepares its financial statements in accordance with the accounting standards of IFRS (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”). The financial statements of the company have therefore been illustrated below. Consolidated And Parent Company Statement Of Financial Position Source: (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”) Consolidated and Parent Company Statement of Financial Position (Cont…) Source: (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”) Unaudited Condensed Interim Consolidated And Parent Company Income Statement Source: (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”) Consolidated and Parent Company Statement of Comprehensive Income Source: (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”) Consolidated Statement Of Changes in Equity Source: (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”) Parent Company Statement of Changes in Equity Source: (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”) Consolidated and Parent Company Statement of Cash Flows Source: (Abu Dhabi Securities Exchange, “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries”) Abu Dhabi National Insurance Company PSC. The financial statement of this company includes interim financial information, statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows. The company prepares the aforementioned statements in accordance with the accounting principles of IASB. Thus, it is recognized that the company follows standards mentioned in IFRS (Abu Dhabi Securities Exchange, “Abu Dhabi National Insurance Company PSE”). The financial statements of the company are illustrated below: Condensed Interim Statement of Financial Position Source: (Abu Dhabi Securities Exchange, “Abu Dhabi National Insurance Company PSE”) Condensed Interim Income Statement Source: (Abu Dhabi Securities Exchange, “Abu Dhabi National Insurance Company PSE”) Condensed Interim Satement of Comprehensive Income Source: (Abu Dhabi Securities Exchange, “Abu Dhabi National Insurance Company PSE”) Condensed Interim Statement of Changes in Equity Source: (Abu Dhabi Securities Exchange, “Abu Dhabi National Insurance Company PSE”) Condensed Interim Statement of Cash Flows Source: (Abu Dhabi Securities Exchange, “Abu Dhabi National Insurance Company PSE”) CONCLUSION Conclusively, it can be comprehended from the above discussion that accounting principles and standards play a crucial role in obtaining appropriate and adequate accounting information. Accounting information is important to determine the performance of business organizations. Moreover, it facilitates in attracting investors in alignment with securing the moral and legal obligations of the companies towards their stakeholders. In this regard, in order to improve the capital market is a single set of accounting principles should be adopted on a global context, which will enhance the significance of financial reports for worldwide investors. IFRS comprises principles and it is developed with the aim of having a single set of accounting standards to be recognized and applied globally. Subsequently, business organizations will be facilitated with the opportunity of developing reliable, consistent and appropriate financial statements. Works Cited “Abu Dhabi National Insurance Company PSE.” Abu Dhabi Securities Exchange. 2013. Web. 13 Nov. 2013. “Oman & Emirates Investment Holding Company SAOG and its Subsidiaries.” Abu Dhabi Securities Exchange. 2013. Web. 13 Nov. 2013. “IFRS Accounting of Pension Obligations.” Allianz Global Investors. 2013. Web. 13 Nov. 2013. “IFRS 3 - Continuing employment.” Deloitte Global Services Limited. 2012. Web. 13 Nov. 2013. Hali, Luzi, Christian Leuz and Peter Wysocki. Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors. No Date. Web. 13 Nov. 2013. “IFRS 3 Business Combinations.” IFRS Foundation. 2012. Web. 13 Nov. 2013. Irvine, H. J. and N. Lucas. The Globalization of Accounting Standards: The Case of the United Arab Emirates. 2006. Web. 13 Nov. 2013. “List of International Financial Reporting Standards.” Laxminiwas & Co. 2013. Web. 13 Nov. 2013. Mohr, Angie. International Financial Reporting Standards - Advantages & Disadvantages. 2013. Web. 13 Nov. 2013. Needles, Belverd E., Marian Powers, Susan V. Crosson. Principles of Accounting. United States of America: Cengage Learning, 2010. Print. Nobes, Christopher. International Variations in IFRS Adoption and Practice. 2011. Web. 13 Nov. 2013. Pounder, Bruce. How Globalization is Affecting U.S. Accountants. 2006. Web. 13 Nov. 2013. “IFRS 3 (Revised): Impact on Earnings.” PricewaterhouseCoopers. 2008. Web. 13 Nov. 2013. “Standards.” Deloitte Global Services Limited. 2013. Web. 13 Nov. 2013. Wong, Natalie. The Trend of IFRS Conversion: What you need to know about the transition from GAAP to IFRS. 2009. Web. 13 Nov. 2013. Read More