The international economic scenario - Research Paper Example

?Contents Introduction 2 International Economy 2 Reporting Standards 3 Differences 3 Case Study 4 Inventories 4 Revenue Recognition 5 Introduction The international economic scenario has changed over the past few years. The reason for this change is the advancement of technology and especially information technology. The accounting requirement for businesses has also changed due to this change. Demands of stakeholders have changed when it comes to information. This is because stakeholders are also becoming global. Single investors holds portfolio of investments in many different regions of the world. Similarly companies invest in many different nations, thus the demand for accounting regulations has totally changed since the last few years. International Economy Online stock exchanges provide excess to capital to organizations from different areas of the world. A very good example would be NASDAQ allowing American firms to raise capital from as far away as Brunei. Another major reason of change in the global regulatory scenario has been the recent economic meltdown. The global economic meltdown is perceived as not only a failure of organizations ability to regulate them but also a failure of regulations and regulatory bodies. Therefore organizations are forced to look for markets beyond their home countries (Europe and USA) to alternate investment and capital sources. Thus in many ways the financial crisis is also forcing organizations to go more global. With going global comes the challenge of tackling many different financial systems and regulatory bodies. Similarly internationally there is a movement to make local regulatory systems more compatible with international systems. The aim of these efforts is to make the local markets more attractive foreign investors. The primary aim of any such moves is to increase understanding, comparability and reliability of financial data. Reporting Standards The aim of above discussion is to present to global economic scenario which is calling for convergence in financial regulations. Currently there are two different regulatory bodies formed for establishing regulatory standards. These organizations are FASB and IASB. The FASB stands for Financial Accounting Standards Board. The IASB stands for International Accounting Standards Board. FASB is an American body credited with the formulation of GAAP i.e. Generally Accepted Accounting Principles. Differences The FASB is operating in a highly litigious environment and thus the GAAP are formulated to suit this environment. This is the very reason that GAAP is a more comprehensive and detailed accounting standard. This would seem a positive aspect of any accounting standard but in reality it becomes a lot difficult to implement or understand GAAP. Moreover for organizations working outside the United States it becomes even more difficult to understand the GAAP as it is closely linked with American Legal system. Similarly IASB is responsible for the formulation of IFRS (International Financial Reporting Standards). As the name suggests, as compared to GAAP, IFRS are simply standards rather than principles. Although apparently minor in nature, this difference totally redefines the IASB standards. This is because IFRS are more taken as more a set of broader guidelines rather than hard-core principles. For many years there has been a competition for dominance amongst the two reporting bodies. This race has already been won by IFRS. The structure of IFRS allows more internationally different regulatory bodies to adopt and adapt them. Thus allow them to address their own specific need and still remain understandable to users and evaluators. Therefore globally IFRS has become the global reporting standards. Emerging markets, underdeveloped economies and developed economies have all shifted to IFRS. The Unites States is also gradually shifting from GAAP to IFRS. The gradual process started with US companies being allowed to report in IFRS as per their discretion. Moreover the AICPA has announced that a gradual process would be started which would ensure than a collaborative effort between FASB and IASB allows for transition to a global standard by 2015. This transition would allow US companies to raise funds in foreign markets and foreign investors to easily invest in US. Case Study A comparison between two different companies has been launched to pinpoint a different they have in terms of reporting standards. The companies chosen for this task are American Airlines and British Airways. American Airlines is a US based company and reports its financial statements using US GAAP. On the other hand British Airways is a British company and reports its financial accounts using IFRS. The following differences have been highlighted between reporting of two companies. Inventories There is a significant difference when it comes to reporting inventories amongst the two companies. AA uses ASC 330–10 to reporting all inventories whereas BA uses IAS 2 for inventory reporting. BA carries inventories on lower of cost or net realizable value. The company defines Net Realizable value as the total expected value from the inventory. On the other hand AA carries inventories at the lower of cost or market value. Market value is defined by AA as the current replacement cost of inventories. Revenue Recognition Another major different is between revenue recognition amongst the two companies. BA uses IAS 18 for reporting revenue whereas AA uses ASC 605 from US GAAP to report revenues. BA recognizes services using long term contract accounting, which includes consideration for the state of completion and whenever revenues/cost can be reliably measured by BA. On the other hand AA does not use long term contract accounting and can only recognize revenues when services have been rendered. References New IFRS to increase financial reporting transparency, Risk Management Review. Available at (http://www.riskmagazine.com.au/article/new-ifrs-to-increase-financial-reporting-transparency-116387.aspx) Ber, J. (2006.) The Quest for Transparency in Financial Reporting: Should International Financial Reporting Standards Replace U.S. GAAP? Hickley, A, (2011), Is transparency more important than IFRS convergence?, GFS NEW Thiru, Y. 2004. IAS/IFRS, US-GAAP and others: What is next? Austria Fall 2004. Alexander, D., A. Britton and A. Jorissen, (2011), International Financial Reporting and Analysis, (5th edition), Andover: Cengage Learning. Hock, B.,Royden, L., Fairchild, D., (2010). Financial Decision Making. Certified Management Accountant Review. American Airlines, (2009), Financial Statements. American Airlines, (2010), Financial Statements. British Airlines, (2010), Financial Statements. British Airlines, (2011), Financial Statements. Read More