Investors and analyst both rely on information and the more they can understand the information being provided to them by an organization the lower they would consider the risk is. Therefore national accounting bodies are continuously changing their accounting standards to make them more global. This global approach increases the reliability, understanding and comparability for analyst and stockholders.
The recent financial crisis has also encouraged the national accounting bodies to take a more stern approach to reporting standards. The general risk averse environment can lead to more sterner reporting requirements by accounting bodies in order to safeguard interests of users of this financial information. One significant movement in this regard is the movement towards ‘fair value accounting’ methods. The aim is to use a more realistic approach towards reporting balance sheet items. The focus is being shifted from reporting historical prices of balance sheet items to reporting the expected future benefits received from the item (e.g. PV of expected future cash flows). This would enable users of financial information to better assess the value of company assets and thus value the entity more accurately. However this would also lead to increased volatility in value of assets. This is because the fair value of an asset is more volatile as compared to historical cost. A potential impact of these rules would be companies looking to invest in less volatile assets to reduce the risk with their holdings.
The recent economic turmoil in international markets, along with factors mentioned aboveencouraged Canada financial institutions to bring major changes to its reporting standards. Canada has used GAAP (Generally Accepted Accounting Principles) for many decades. The Canadian GAAP however would now be abolished in order to shift to the IFRS (International Financial Reporting Standards). Private, Public and non-profit entities all are affected by this major shift