Benefits of International Standardization of Accounting Standards - Assignment Example

? Financial reporting Benefits of international standardization of accounting standards Accounting standards refer to principles of accounting, methods and laws provided by an accounting board, the International Accounting Standards Board which is an independent body. The aim of the board is to set operational standards that apply equally to financial reports of both local and international public firms (Australian Accounting Standards Board [AASB] 2010). Standardization of the accounting standards refers a procedure of establishing and agreeing to the technicality of the set standards. It eliminates all the alternatives associated with financial reporting. There are various benefits of standardization: Standardization of accounting rules enable multinational firms in developed nations to create significant employment opportunities in the job market. Professionals in accounting and other fields find it easy to relocate to other countries as a result of globalization for there is a common language in preparation of financial reports and accounts. For instance, countries such as Hungary and India forward their accounting duties to companies based in developed countries (Iatridis 2010). These firms spend less time trying to be in line with a country’s accounting policy and strict regulations as most of the rules are adopted from International Accounting Standards. Moreover, adaptation of globalized standardized accounting standards has made it easier for firms to centralize their training in accounting and increase the number of financial care centers. Transparency of unified financial standards has a boost in division of labor in the global market thus it enables smaller investors to invest in other countries. Standardization of accounting standards promotes innovation. These standards give rise to new markets and products hence, creating a significant enhancement for innovations (Hesser, 2006). Consequently, innovation result to improved sales. Minus these standards, there would be poor quality products that might limit the boosting of innovation since the remnants of the stock could not be transferable to other places. Furthermore, unified standards enlarge the scale of inventive products thus in absences of the standardized standards, these products are hardly obtained. In developed nations, the International Accounting standards assists to converge the systems of accounting and reports made available for investors. This would support global financial investments and innovations (Hal, Henock 2007). Standardized accounting standards enhance the ability for firms to forecast profits. This is a reliable opportunity for investors because the transaction cost goes down when specific national accounting regulations disappear. Companies cut on the costs of external auditing and employment of experts for the purposes of global comparison reports. International Accounting standards initiate stiff competition in auditing that reduces the inescapable costs for auditing. Unified accounting standards reduce the costs of capital. Most domestic investors run their businesses within their countries since financial reports are prepared in line with the known worldwide accounting standards that could be easily interpreted. For international investors, the most preferred financial reports should be made using the international standards and not the domestic ones. This reduces the cost of investing in foreign countries since there is no variation in rules of accounting and cost of creating financial reports. Therefore, standardized accounting standards lower the cost of capital because investors are in agreement with lower returns from business securities and a decrease in investment risk. Who has to comply with accounting standards? Accounting standards refer to specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. This implies that those who have to comply with the accounting standard are accounting professions entrusted with the responsibility of preparing financial statements for various organisations. Where to find accounting standards Accounting standards can be found globally as different countries have their own accounting boards formulating the accounting standards. However, all must be agreement with the International Accounting Standards from the International Finance Accounting Standards Board (IFAB). This is an international body that issue International Accounting Standards (IAC), sometimes referred to as International Financial Reporting Standards (IFRS). Basic objectives of General Purpose Financial Reports? Most investors depend on the information found in the companies’ financial reports to evaluate their operations and when making decisions about investments. There are two major objectives of General Purpose Financial Reports: General Purpose Financial Reports provide sufficient and useful information to users, for decision making and evaluation of probable distribution of limited resources. In business, there are resources (such as labor, capital and raw materials) that have a finite distribution and might be inadequate. When a firm attempts to produce a new product but unfortunately it fails along the way, it will not be in a position to gather more resources and proceed. Thus, accurate information enables businesses to make sound decisions under such circumstances. General Purpose Financial Reports ensure that financial statements might be used to hold firms accountable for the resources under their control. Most organizations control crucial resources in any economy. They have a duty to provide financial statements since their job is to create employment opportunities and wealth. The entire economy demands to know how firm control and utilize their wealth (Hesser, Geilzer and Vries 2006) so, by providing reports about their financial positions, these organizations can expose their accountability. Qualities that make financial statements useful The main objective of a financial statement is to satisfy the needs of stakeholders and other interested users. Thus, the most essential characteristic is quality. This is an attribute that develop the report’s meaningfulness. Though, financial statement must have other characteristics that contribute to its quality; they include relevance, comparability, ‘comprehend-ability’ and reliability (Baker and Wallage 2000). These are the fundamental features of a report since they rely on presentation and consistency. Comparability Financial report of a company should resemble the statements from other firms by every aspect. However, these statements should not necessarily be identical but must give room for comparisons. For instance, suppose there is a financial statement from a company prepared using diverse methods from other firms. It is probable that the organization would not be in a position to provide a significant comparison on reports from other companies. Comparability of a financial report is sustained by consistency of preparation and exposing of accounting rules, most likely when drawing comparisons among units that use diverse (but valid) methods such as the average cost (Leftwich 2004). Comprehend- ability Even though financial statements might be difficult for people to comprehend, the users should be in a position to understand the information contained in it. This relates to the layout, preparation methods, the ‘language’ used, policies and the possible assumptions present. The obvious assumption here is that the users of the financial reports have adequate knowledge to read and interpret the information accurately. The ‘comprehend – ability’ feature of a financial statement ensures that a user with the fundamental accounting knowledge can easily tell the financial state of an organization from the information. Relevance One chief reason why financial statements are prepared is to enable the users to make informed decisions. Therefore, the information should have some relevance in line with the decisions made by the users. Every item in a financial report assists the users to make historic or future assessment of a firm. So, the entire document must be relevant. Reliability In accounting, a reliable material should be error-free since biasness and errors affect the user’s decision making. Precisely, a reliable report must be consistent and fair in presentation of information about the financial position of a company. A reliable report should be transparent so as to build the confidence of its users (Kohlbeck and Warfield 2010) Arguments supporting pro-regulatory perspective.  Regulations can be termed as a set of rules which are designed to govern and control the conduct by the authority. Pursuant to this definition, we can define regulation that relate to financial accounting as rules formulated by an independent recognized body that govern the preparation of financial statements commonly referred to as accounting standards. Since time immemorial, numerous arguments have been raised both for and against the existence of accounting regulations. This part of this paper will be examining the various arguments in support of pro-regulatory perspective (Barton and Waymire 2004). The pro-regulatory perspective subscribe to the belief that accounting information is a free or public good and a unique one in such case and should therefore not be treated in the same manner as other goods. This is mainly because in the presence of free-riders, the actual demand is always understated since the pricing system in an open market does not function properly. This will in the long run lead to underproduction of information thus the need for regulation in the market as a means of reducing the impact of the failure of the market. Public Interest theory Amongst the various theories in support of pro-regulation was the public interest theory which argues that the regulations are put in place for the benefit of the society as a whole and on for any vested interest. Consequently, the regulatory bodies are for the representation of the interests of the society as opposed to the wide notion that it is for the regulator’s private interest. For this, an assumption is made placing the government only as a neutral arbitrator. Various criticisms have been levied against argument with arguments in its opposition being on the assumption of the economic markets operating inefficiently if unregulated and the assumption of the issue of regulation being virtually costless and most importantly the assumption of the neutrality of the government. Another argument for pro-regulation has been what has commonly come to be known as the capture theory. The theory argues that the regulated in the market seeks to capture or in other words take charge of the regulator in addition to seeking to ensure that the rules that are subsequently released tend to be only advantageous only to the parties that are subject to the regulation. However, it is noted that despite regulations being initially aimed at protecting public interest, it has always proved to be very difficult for the regulators in the market to remain independent (Jones and Finley 2011). Various criticisms point that there is no sufficient reason that give suggestions that it is only the regulated industry in which the interest group can influence the regulator. Additionally, it has not been proved why it is postulated that only regulated industries can be able to capture existing agencies and not procure the creation of an agency and reason being given why the regulated market could not prevent against creation of the regulated agency (EBonson 2009) The economic interest group theory This argues that various groups are always in conflict with each other which will always make them to tend to lobby the government to formulate legislations of benefit to them but at the expense of others. The arguments makes the assumption that groups will always tend to form with the main purpose of offering protection to particular economic interests. However, the argument provides no notion of inherence of the notion off public interest. Additionally, the argument deems the regulators to be only motivated by self-interest. The argument views the regulator as a non-neutral arbitrator who is an interest group in itself and the regulator is always motivated to ensure he is re-elected or maintains the position of power he holds (Kosarkoska and Mircheska 2012). Consequently, regulations are viewed to be serving only the private interests of the politically effective groups hence the groups with insufficient power is not always able to effectively lobby for regulation to offer protection to its own interest (Rencheng, Wei Shi 2012). Amongst the numerous examples of the application of this argument would be the industry groups which lobby to either accept or reject a given accounting standard, lobbying by accounting firms in order to protect their interest or politically large firms which may be found to lobby in favor of general price level accounting in the united states. First, an organizations financial reports are normally prepared by an organizations management who in most cases are not the owners of the company but who are involved in the daily operational management of the company. By virtue of their positions, they tend to be in preview to much information compared to both the company’s shareholders and the stakeholders. In the absence of the regulations, despite the fact that the management might still disclose relevant accounting information voluntarily in a bid to continue receiving funding, the degree of credibility and completeness of the provided information may be comprised (Kosarkoska and Mircheska 2012) Various studies postulate that accounting disclosures indicate that accounting disclosures for pubic limited companies which are in actual sense firms making equity offering has significant normally observe significant increase within six months before the actual offering especially in those categories the company has discretion. This implies that the firms might fail to disclose all the relevant information to the public or they might intentionally withhold important information from the users of the information for their own benefits which raises questions about the reliability of voluntary disclosures. Additionally, the existence of asymmetric information will tend to lead to inequality in terms of opportunities and returns amongst investors (Habib and Hossain 2013) Numerous studies unanimously agree that before imposition of Regulation Fair Disclosure in the United States, most Wall Street brokerage companies including their best customers utilized the opportunity to reap trading profits before most investors received information on the same. Works cited Australian Accounting Standards Board [AASB] 2010, AASB 101 Presentation of financial statements, Financial Reporting Handbook 2011, volume 1, Institute of Chartered Accountants, Wiley, NSW. Hesser, W, Geilzer, A and Vries, H. Standardization in companies and markets. Hamburg. Working paper Helmut Schmidt University, 2006. Iatridis, George International Financial Reporting Standards and the quality of financial statement information International Review of Financial Analysis, Volume 19, Issue 3, June 2010, Pages 193-204 Hal White, Henock Louis, Do managers intentionally use repurchase tender offers to signal private information? Evidence from firm financial reporting behavior  Journal of Financial Economics, Volume 85, Issue 1, July 2007, Pages 205-233 Baker, Richard and Wallage, Philip, The Future of Financial Reporting in Europe: Its Role in Corporate Governance The International Journal of Accounting, Volume 35, Issue 2, July 2000, Pages 173-187 Leftwich, Richard, Discussion of: “Investor protection under unregulated financial reporting” (byJan Barton and Gregory Waymire) Journal of Accounting and Economics, Volume 38, December 2004, Pages 117-128. Barton, Jan and Waymire, Gregory, Investor protection under unregulated financial reporting Journal of Accounting and Economics, Volume 38, December 2004, Pages 65-116 Jones, Stewart and Finley, Aimee. Have IFRS made a difference to intra-country financial reporting diversity? The British Accounting Review, Volume 43, Issue 1, March 2011, Pages 22-38. EBonson, Cortijo. Towards the global adoption of XBRL using International Financial Reporting Standards (IFRS) International Journal of Accounting Information Systems, Volume 10, Issue 1, March 2009, Pages 46-60 Habib, Ahsan and Hossain, Mahmud CEO/CFO characteristics and financial reporting quality: A review Research in Accounting Regulation, Volume 25, Issue 1, April 2013, Pages 88-100. Rencheng Wang, Wei Shi Dynamic internal control performance over financial reporting and external financing  Journal of Contemporary Accounting & Economics, Volume 8, Issue 2, December 2012, Pages 92-109 Kosarkoska, Desa and Mircheska, Irina The Main Process In the International Financial Reporting at the Beginning of 21st Century  Procedia - Social and Behavioral Sciences, Volume 44, 2012, Pages 241-249. Bradbury, Michael and Schroder, Laura. The content of accounting standards: Principles versus rules The British Accounting Review, Volume 44, Issue 1, March 2012, Pages 1-10 Kohlbeck, Mark and Warfield, Terry. Accounting standard attributes and accounting quality: Discussion and analysis Research in Accounting Regulation, Volume 22, Issue 2, October 2010, Pages 59-70. Read More