Accounting is the base for any business. It is very important for any business, so without accounting any business would collapse. Companies wouldn't be able to keep track of expenses and incomes. Globalization has changed the way companies work. Therefore, accounting was affected by globalization because it was divided to two types: financial accounting and management accounting. Each of these types has a special purpose in order to enhance an enterprise's performance.
The aim of this assignment is to investigate the way that globalization has changed the traditional method of accounting practices. It will also show the different types of accounting and how they work in order to increase the efficiency of internal business.
The difference between financial accounting and management accounting.
The impact of these two kinds of accounting on business.
How globalization has changed the way of accounting?
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How companies adopt and deal with these new methods of accounting?
Making accounting more international: Why, How, and How far will it go?
There are two types of accounting: financial and management. The purpose of financial accounting is to provide information on the financial status of the business to bond holders outside the business. They can be shareholders, finance institutions, banks, partners and so on. Therefore, the financial accounting has its own users, such as external and internal users.
On the other hand, management accounting provides information about the financial situation of the company to the managers inside the company. This kind of information will help managers. For example, when prices increased, is it possible to grant salary increases, is it important to dismiss workers, and so on.
Management accounting information can be presented in any way suited to manage the work of a particular; one thing that matters is that this information should help managers to make appropriate decisions which will affect the business positively. In contrast, in order to obtain the information from a financial accounting point view, some rules and guidelines must be followed precisely in the collection of information and the final form of submission. These standards and guidelines, internationally and applied in practice.
Financial accounting reports the financial situation of the business or the company as an entire entity. While management accounting reports for each department or division separately and to acquire all data that helps management to evolve its procedure. Therefore, any commercial activity or any company has a section which controls accounts in the entire company. However, each division or department establishes or collects the accounts and reports of its own administration.
Financial accounting is for the benefit of bondholders from abroad, while the management accounting is for the benefit of directors of business who are inside the company, in other words, for domestic consumption. Rules of the financial accounts provided by law and according to internationally recognized practices which are influenced directly by the globalization of business. For example, it is mandatory for any listed company to submit financial statements annually, according to specific international practices. However, there are no laws or rules governing the management accounts because it is based on the interior policy of the company and the way of managing the work.
Financial accounting presents an overview picture of the financial situation of any commercial activity for a specified period. It aims to analyse, evaluate and examine the performance accurately by the public. In addition, information inside these reports is not confidential and everyone can find it. On the other hand, the management accounting should provide specific information that could be useful in evaluating each division of the company separately.
The financial account is basically concerned with providing information to the external parties of the business. External users of the accounting information are individuals and other enterprises that have a financial interest in the reporting enterprise. But, their interest is not involved in the day to day operation of the business (Wiliam and Haka, 2005, p. 9). It shows that, sound and efficiently produced financial accounting information can help the business maintain a good success pathway, because, many groups interested in the firm depend on the financial accounting information.
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The external parties include owners, creditors, government agencies, labour unions, customers, suppliers and trade associations. All these groups require unique information of financial position of the business in order to take their decision accordingly. For instance, customers need to know the financial ability of the business so that they can decide whether to purchase or not from the business. Purchase decision depends on the quality of the goods and it will be affected by the financial ability of the enterprise. Likewise, external parties depend on the financial accounting information in order to take their decisions and evaluate the financial status of the business. Financial accounting helps users analyse the financial strengths of the business that in turn would be of greater help to the investors to take decision regarding the investment.
The external parties largely depend upon the financial analysis of the reporting business in order to understand the financial position of the business. Balance sheet, profit and loss account and cash flow statement can help them understand the financial position of the business. Government agencies like Federal Trade Commission may be interested to know whether the enterprise can meet certain governmental regulations that apply to them.
With the revolution of global trade there have been too many changes on the accounting policies that have affected the way of trading chain in many ways, which is indeed the definition of globalization which is defined as " a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology" (Donald, 2007). The influence of globalization of the economy should be reflected in accounting. Accounting is known as the language of business. Because of the influence of globalization, the whole world is becoming a small village with bigger sizes of companies and more international staff with a variety of equipments used in industry. This has made dealers and owners of companies demanding new sources of financing by issuing shares and bonds for new investors.
It is highlighted that Accounting is a subject to the regulations of the World Trade Organization (WTO) and the General Agreement of Trade in Services. The objective of the World Trade Organization is to design common accounting standards all over the world in unique international standards because this will help to Increase the efficiency and the effectiveness of accounting policies that encourage investors and trade exchange between the various countries of the world. Supporting international accounting standards, as well as finding international qualified accounting system are important. The implementation of these international standards on a large scale of different countries will help to modernize the accounting profession and make it aligned with the changes of globalization around the world. Therefore, when the accounting profession has already acquired its universal character, there will be hoping to have a greater and more solid global economy.
Drori and Meyer (2006) illustrated that due to globalization, if a country has more organizational linkage to the world, the country will more likely observe the norms disseminated by world society. Many professional associations have made efforts to establish international accounting standards in order to increase the corporate transparency in the world (p. 181). International financial managers need to participate in international accounting and reporting activities. They must decide which accounting system and standard their enterprise will choose from IFRS and GAAP. This is the main change in the accounting practice brought by globalization of business.
In addition, systems and tax laws have been developed. As a result of all these changes, there is a need for accounting reports. The accountants unions have always concerned about the rules of the accounting standards internationally, which resulted in what became known as the standards accounting principles. With the expansion of companies' activities outside their national borders and the requirements of margining companies internationally with the general accepted accounting principles.
In 1993, under German GAAP, Daimler Benz reported a profit of a68 million deutsche marks, but at the same time, under US GAAP, the company has reported a loss of around one million deutsche marks (outlook business, May 2008, p. 34). It is an illuminating example how different accounting standards can bring confusion in the financial and capital market. Companies are increasingly concerning about accounting standards that they have to choose and this can be considered to be the major change cause by globalization.
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Different countries and companies adopt either GAAP or IFRS based on the benefits they can obtain by embracing it. For example, Indian companies move to embrace the IFRS standards because of the benefits including lower cost of raising foreign capital and greater cross border investments.
Prior to 2005, the European Union countries were following their own accounting standards. Once the EU countries identified the difficulties arising from following their own accounting standards, they turned to follow a common accounting framework. They had only two options of International Accounting Standard and US GAAP. The EU decided to follow International Accounting Standard after considering various influencing factors. About 8000 companies listed in EU followed IAS accounting standards (Outlook business, May 2008, p. 34). Later on the IAS has become IFRS.
The changing environment of the modern business shows that there is a growing trend towards the relevance and necessity of common accounting practice and making it uniform across the national borders. The globalization has brought major in changes in the business and accounting practices and that lead to internationalize and harmonize the rules of accounting.
Williams and Haka (2005) stated that the need for comparable information has led to an interest in the harmonization of accounting standards. Harmonization is a term to describe the standardization of accounting methods and principles used in various countries of the world. The International Accounting Standard Board (IASB) is highly interested in harmonization and is recently charged with the responsibility of setting and gaining acceptance of international financial reporting standard (IFRS) (p. 677)
When companies operate within its own borders and in the home country itself, differences in accounting practice bring no significant attention among other enterprises or stakeholders. But, when firms go across the borders, and when it sells or buys goods or services from other countries, there are various aspects that are more likely to be affected by the accounting standards being followed. The lack of accounting comparability becomes thus a greater issue in international markets. When a company deals with cross border financing by selling its securities in other countries' capital market, the accounting comparability remains to be a concern among the businesses. Because of these issues in the cross border relations, the establishment of a uniform accounting standard has become increasingly important.
Ball (1995) argued that the main determinant of accounting rules is the market demand. In many of the market settings, financial statements are widely used to represent trisections with corporations. So, it is up to corporations to incur the cost for preparing them. There are political reasons as well. The relative importance of market and political influences vary from country to country and time to time (p. 2).
Accounting rules are being shaped by economics and politics and hence there is always a need that accounting rules to be driven by related developments. Globalization and internationalization of the political influences on accounting are the basic two factors that push to the need for international accounting standard.
Internationalization of accounting standards has been accomplished through various organizational endeavours like IAS, IFRS and GAAP. The growing concerns among various international companies regarding the efficiencies and accuracy of these accounting standards and financial reporting show that a uniform and internationalized standard is still to be accomplished.