The Financial Standards - Example

Name: Professor`s name: Course number: Date: Contextual summary International Financial Reporting Standards (IFRS) can arguably be defined as a common universal business language whose sole aim is to enable the global business practicing companies or rather the business organizations to properly understand and compare themselves with their global counterparts across the so called international boundaries. This universal uniformity in accounting field enables the business practicing companies to compare themselves with least difficulties. This has been achieved due to the uniformity in accounting standards across the all continents of the world. This particular set of rules that is classified under the internationally accepted international financial reporting standards enables the accountants to actually maintain the books of the accounts thereby enabling the effective maintenance of specific entities within a particular company such as the cash flows, the liabilities or the equity amongst the other entities in a business organization. Therefore we can now understand that proper maintenance of such entities enables proper understanding of the performance of a specific company by the shareholders or the likely investors. The commencement and use of the international financial reporting standards began in the European continent after which the use of the standards spread to various countries of the world. Introduction Financial standards are normally defined as the representations of the financial positions and the financial performance of a particular entity in a business organization. The overall objective of such financial statements is to provide qualitative and reliable information about the financial position, the financial performance, the cash flows as well as the other specific entities that are normally entailed in a sound and practicing business enterprise. An entity in a business realm can take the dimension of a cash flow, an asset, a liability, equity or rather the income and expenses of a company. At this age of modernization in our world, it is indeed very easy to note that a business enterprise can present its respective financial statements on the same basis as its foreign competitor located several thousand miles away but they can be compared due to the uniformity in which they present the per5formance of their companies. Therefore it is very true that the similarity in IFRS are presented is wall what enables comparison of various business enterprise across the globe making it easy for the investors to major in the fields of interest without much risk being involved. Literature review The International Financial Reporting Standards have underlying merits and demerits. Therefore in this particular paper we shall discuss the advantages and the disadvantage of adopting the international financial reporting standards in companies and countries to be specific. (a) The merits of adopting the International Financial Reporting Standards (IFRS) (i) Comparability Business organizations or companies that rather use same language of accounting are easier to compare. If such companies use same standards of financial reporting to [prepare their annual financial statements, then it is easier to compare them more accurately and be able to make sound judgments. this is arguably very important when the investors are trying to make the investment choices. They can pick countries of their interest and compare companies that are majoring in their fields of interest. Through such comparison means, the investors stand the best chance of making the right choices. Otherwise the advantage of comparability between companies from different countries of the world would have been very difficult since different standards of reporting would have been different. (ii) Greater flexibility The international financial reporting standards (IFRS) employ the notable philosophy of being principles-based rather than the normal rules-based philosophy. The principles based philosophy means that the goal of each standard is to actually effectively arrive at a reasonable valuation and there are many means or rather ways of arriving at that valuation. this philosophy enables the companies have the freedom of adapting the international financial reporting standards (IFRS) to their particular situation of interest which enables the realization of readable but also useful and detailed financial statements regarding the company unlike the rules based philosophy. The rules based philosophy is defined as the philosophy where certain set of rules must be adhered to and followed when preparing the financial statements of company. The rules based philosophy is not dynamic enough compared to the principles based. This has led to the limitation of their use during the preparation of the financial statements in a business organization. (iii) Increased market efficiency The adoption of the international financial reporting standards has led to the realization of the bonus time and money. Economists have argued that reducing the cost of processing the financial statements increases the efficiency with which the stock markets incorporate its prices. Investors can easily buy and sell their stocks in time by a click of the computer mouse nowadays. Therefore the investors easily gain from the implementation of these international financial reporting standards (iv) Reduced barriers to the cross-border acquisition The international financial reporting standards have greatly reduced the international differences in realm of the accounting standards. This has consequently led to the removal of barriers to cross border acquisitions the latter diversities by the investors. Also to note is that the r5euced cross border restriction has enabled the increased take over premiums. (v) Accuracy The international financial reporting standards promise extensive and accurate comprehensive financial statement information when compared to the countries’ national standards they have replaced for the general public finaci9al reporting in many world countries. The European, Asian, American and many African countries have already adopted the globally accepted IFRS due the accuracies they bring about when undertaken during the processing and production of the financial statements. This increased level of accuracy has enabled the investors to always be more informed prior to investing their dollars in any investment opportunity that may arise or indulge in at will. But most important to note is that the risks are normally lowered when the IFRS are adopted in preparation of the financial statements. The disadvantages or the demerits of the International Financial Reporting Standards (IFRS) (i) International financial reporting standards are not accepted globally When we talk of the IFRS standards being not globally accepted, we are simply implying that there some of the world nations that have not adapted the IFRS standards in the field of accounting in their home nations. Such countries include the United States of the America. In those countries that have not accepted or adopted the international financial reporting standards, they use their specific standards such as the GAAP in the preparation of the financial statements. The United States of America employs the GAAP standards in the preparation of the financial statements of the various government agencies and the business organization based the country. This action makes it difficult to compare the performance of the home based companies with the foreign based companies that utilize the IFRS standards in the financial reporting. (ii) Risk of manipulation This is the major downside of the IFRS standards due to their aspect of flexibility. It can easily be noted that the business organization or the companies will only utilize the methods they wish meaning that the financial statements will reflect only what they desired or wish. Various aspect of the company such as the revenue, the profits can hence be manipulated with lots of hence directly affected the investors choices negatively. It should be noted that this aspect of financial data manipulation can be used to hide the financial difficulties of the company hence encouraging the acts of fraud with very much ease. When an accountant changes the method of the company`s inventory valuation, more income can be brought into company’s current year`s profit and loss financial statement and hence make the company appear to have made more profits. (iii) High costs are involved in the adoption of the IFRS standards When any nation of the world adopts the international financial reporting standards, both the large and the very small scale companies are impacted to the same level. The small companies do not have large sums of money at their disposal to undertake the necessary regulations that are dictate the adopted IFRS standards meaning such standards will impact them negatively. Somewhat large sums of money will be required to make the necessary changes dictated by the international financial reporting standards such as training of the staff. This makes it harder for the smaller companies unlike the major big companies who are in excess of capital. Smaller companies will be required to bring outside accountants or qualified personnel to help in the process of the changeover. This simply means that the financial burden will only be experienced by small companies. (iv) Monopoly Another major downside of the international financial reporting standards (IFRS) is that when companies convert to the IFRS, it makes the IASB the monopolist in the manner of the setting of the standards. For example when a country such as the United States of America converts to IFRS, the GAAP will no longer be involved in the setting of the reporting of the financial standards across the globe. IASB will monopolize the whole process and hence reliable information at times will not be obtained due to the flexibility of the IFRS standards. The International Financial Reporting Standards (IFRS) in Australian context In Australia, the Australian Accounting Standards Board (AASB) is the body tasked with preparation of accounting standards to be used in the country`s financial reporting. This particular body has issued Australian equivalents of the IFRS which are named as (A-IFRS) and it has been established that they number as AASB1-8 and AASB101-141. These specific standards have been manipulated to fit the needs of the Australian financial reporting purposely to allow high levels of transparency. The manipulations of these standards have led several advantages among the Australian business community. The major advantage of the adoption of these standards is that the Australian companies have been able to compare their performance with their global counterparts especial in the fields of financial sector and the tourism and hospitality. This has led to many Australian companies investing across the borders especially the neighboring Asian countries since they can easily understand how the real business situation is at the ground. The second major advantage of the adoption of the IFRS equivalent in the Australian society is that high levels of transparency and accuracies have been realized. The equivalent standards that have been adopted have sealed the likely loopholes which would have otherwise enabled cases of fraud in the respective business organization. Also notably important is that data of high accuracies that is extensively reliable has been obtained since the standards dictate all the necessary data values that have to be present in the financial statements of the business companies and other bodies that require financial reporting for the general public and the investors. Investors in this specific case will be able to invest their dollars without much worry since all the necessary sensitive information about the investment is already availed in the financial statements. The third major advantage about the adopted IFRS equivalent standards is that additional disclosures for the not-for-profit entities have been added to the standards rather than exiting them from the IFRS for the Australian entities. It should also be noted that the for-profit entities that are normally used in the preparation of financial statements are in accordance with the A-IFRS and they entail, unreserved statements of compliance with the international financial reporting standards (IFRS). However the adopted of these modern financial reporting standards have their downside. After a conclusive study of the standards, it was easily noted that some non-IFRS compliant requirements were found to apply for not-for- profit and the entities in the public sector domain. This simply means that certain segments of the currently practiced standards are non IFRS compliant. The other notable major demerit of the adopted standards is that eligible entities can opt to follow the Reduced Disclosure Requirements whilst the entities within the accountability of public domain cannot exercise the Reduced Disclosure Requirements (RDR) but only have to adhere are totally comply with the Australian Accounting Standards. Conclusion To conclude this paper, we have actually noted how important it is to have uniform financial reporting standards worldwide. Having uniformity in the manner in which we report the financial aspects of the business organizations or rather the business companies paves way for the comparison of their performance especially the multinational companies which have branches in the various countries of the world. Therefore due to the demand of the a uniform financial reporting standards across the world, the international financial reporting standards were introduce Therefore due to the demand of the a uniform financial reporting standards across the world, the international financial reporting standards were introduced and it was the duty of each country to adopt them. And it was the duty of each country to adopt them. Countries that support stock exchange kind of business found those standards very useful and they adopted them. The international financial reporting standards (IFRS) were found to be very useful due to their flexibility and high levels of accuracy but their major downside was the cost that has to involved when changing form the current standards to the IFRS standards. It was established that the small companies were likely to suffer financially whilst the big companies would not suffer at all. References (2000). International financial reporting standards. ERNST & YOUNG. (2005). International GAAP: generally accepted accounting practice under international financial reporting standards. London, LexisNexis. Top of Form INTERNATIONAL ACCOUNTING STANDARDS BOARD. (2003). International financial reporting standards (IFRS's): including international accounting standards (IAS's) and interpretations as at. London, International Accounting Standards Board. INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE FOUNDATION. (2003). International Financial Reporting Standard 1: first-time adoption of international financial reporting standards. London, International Accounting Standards Committee Foundation. Top of Form INTERNATIONAL ACCOUNTING STANDARDS BOARD. (2003). International financial reporting standards. London, International Accounting Standards Board. Bottom of Form Bottom of Form INTERNATIONAL FINANCIAL REPORTING STANDARDS FOUNDATION. (2004). IFRS Foundation - IASB. London, IFRS Foundation. http://www.ifrs.org/. Top of Form IFRS FOUNDATION. (2010). 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