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Over recent years, there has been a movement away from national accounting standards to a system of international accounting standards.
The major function of accounting is to ensure that the various accounting information are communicated to the various stakeholders using acceptable methods that is understandable by all the members. In order to achieve the uniformity of accounting data and records, it is necessary to follow some given framework. On of the frameworks developed by the international accounting body are the international accounting standards (Hansen, 2010). International accounting standards refer to accounting standards that are given by International Accounting Standards Board (IASB) and its predecessor, International Standards Committee (IASC) to assist accounting departments in ensuring that all the accounting data are adequately and properly communicated. The following gives a discussion of the purpose of the IAS.
The IAS's main purpose in the developing and accounting for information is to standardize the accounting policies within the accounting framework within a given organizations to in order to achieve the best of the accounting practices. Since organizations differ in structure and practice, there are those organizations that would adopt certain systems in the preparation of the accounting information (Oracle White Paper, 2008. These accounting policies and principles applied by the various organizations may differ hence a common point is required thus the need for the IAS. IAS has been very useful in giving a general overview and framework upon which all the organizations adopt a universal method acceptable to everyone within the firm and all other financial information users.
Other than harmonization of the various policies used in the preparation of the accounting information, the IAS has given a basis of uniformity for the application of the various accounting policies and procedures (Norton, Diamond & Pagach, 2006). The uniformity is very necessary since the financial statements are not only used by the management of the members of the organizations but also the various outsiders who may want to be stakeholders within the firm. There is therefore the need to obtain a common measure for evaluating the various organizations in order to make informed decisions about investing in those organizations or not (Broadbent, Broadbent& Cullen, 2003). IAS has been very useful in eliminating the confusing variations in accounting treatment and this has achieved so much within the investment sectors of various organizations.
IAS has led to effective, independent, and high quality accounting and auditing through the various standards they have in place. Many of the internal auditors apply the various standards of IAS in order to produce better results of high quality (Harris & Mongiello, 2006). Audits firms have experienced an effective control system worldwide through the application of the International Accounting Standards. What's more, there has been an assurance in the profession-wide quality across the auditing and accounting firms (Hansen, 2010). Through the IAS, there has been advance application of an active regulatory oversight charged with the mandate of ensuring that all the required policies and standards are met to the expectations of not only the stakeholders but also the outsiders. In this line, the International Accounting Standards have to a large extent led to a high quality accounting and auditing sections in various firms.
IAS has given a basis for comparability of two or more organizations in terms of financial performance with a view of understanding the best out of the many organizations. This gives the basis for enhancing the making of decisions as regards the investment into various firms. Application of IAS has facilitated global comparisons of financial statements of different firms of companies or even different accounting periods within the same firm due to the fact that all these firms and periods apply the same policies and procedures I reporting the financial information (Oracle White Paper, 2008). There is therefore the concept of consistency within the carious principles in accounting of firma and organizations as well as the different accounting periods of the various firms. This has been very useful in enhancing the making of informed decisions amongst the shareholders, the management, and the outsiders regarding the performance of the business.
Reliability of accounting information for the various firms and categories of organizations within different accounting periods has led to the appreciation and stability of the economic systems. Stability of economic systems within an accounting framework has been very influential in enhancing the trust and faith that persons may have not only in the organization but also within the various types of organizations and the different accounting periods (Norton, Diamond & Pagach, 2006). Trusting in an organization by various stakeholders is a useful tool in achieving a desired state of market share. This has been enhanced by the IAS through giving the platform of reliability of the data communicated within the various financial statements (Harris & Mongiello, 2006).
It is true that the use of IAS has since promoted better understanding of accounting statements, the various disclosure of significant policies regarding the reporting of the accounting information, and the process by which accounting policies are disclosed in the statements (Hansen, 2010). Other than the above discussed purpose of IAS, the standards have been applied in accounting departments due to the deeper understanding of the respective policies regarding the preparation of the accounting statements (Norton, Diamond & Pagach, 2006). Through the IAS, it has become easy for different companies to be able to disclose their financial statements without fear or any biasness as they follow the policies to the latter.
The International Accounting Standards have in deed changed accounting and auditing sections of different firms. Different companies and organizations are now able to give proper financial statements within a given framework thus attaining reliable and high quality financial statements. These high quality financial statements have been able to give pictures of different companies in a universal background hence people are able to compare and contrast the performances of the companies and make the right decisions regarding investment portfolios in such firms and industries (Broadbent, Broadbent& Cullen, 2003).
2. Â Discuss the reasons for the development of a framework of international accounting standards over the last ten years, which has led to a system of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). Â (30 marks)
The global financial sector has undergone a tremendous improvement and changes over the last ten years probably due to the dynamism in the contemporary business world. Business environment has been marked with turbulent activities that change every day within different sectors of the economy. Technological changes and advancements have been behind the wheels in propelling the world to what is today. Through the technological advancements, there has been reduction of many barriers to trade such as the landscape barriers as the world has been reduced to a global village (Oracle White Paper, 2008). This has resulted into different organizations from different sects of the world performing business together. There have therefore been tremendous changes leading to a demand for a universal accounting system to evaluate various companies and their financial information. The need for International Accounting Standards and International Financial Standards has been necessitated by the following factors;
There has been the need for a universal base for judging the performance of the various firms within different industries. Business dynamism in the contemporary world has created so many changes in the way people conduct business. One of the ways through which the business environment has been changed is the globalization concept where the reduction in barriers to reaching the international community such as the removal of transport barriers has been broken down. The result of such activities is the operations of different business within the same environment (Norton, Diamond & Pagach, 2006). This has called for various stakeholders and promoters of businesses especially the financial sector to come up with a universal way of looking at the financial performance of the various companies and industries hence the development of the International Accounting Standards and the International Financial Reporting Standards (Hansen, 2010). These two frameworks provide a common basis for evaluating financial performances of different firms from different industries and different locations of the global economy.
Since many different firms used their own accounting and financial reporting standards, some of the methods applied are meant to favor the operations of the particular business in questions. Again the globalization concept has resulted into firms operating in more than one country hence dealing with different stakeholders. Such stakeholders have always wanted an effective and efficient measure of the financial performance of the firm other than being universally accepted as discussed above (Oracle White Paper, 2008). The need for an effective and efficient measure of financial performance of various companies within different industries necessitated the development of the International Accounting Standards and the International Financial Reporting Standards.
Auditing and accounting in domestic firms had been considered inferior and of low quality. This is because most of the auditors would perform the auditing and give reports that never followed any structure. There was a cry amongst different firms of how the auditing firms were taking advantage of this and colluding with the management of firms to swindle money away from the firms (Norton, Diamond & Pagach, 2006). Better still the management used the weaknesses of the auditing firms and professions due to lack of proper structure that could lead to achieving a high quality results. This prompted the need to have a well-structured auditing and accounting framework that was to see various organizations and firms perform better (Follesdal, Wessel & Wouters, 2000). This need for good structures that produces high quality results gave rise to the development of the International Accounting Standards and International Financial Reporting Standards that have so far provided the required framework that promotes high quality auditing and reporting procedures through the set guidelines (Oracle White Paper, 2008).
Globalization also led to different companies requiring loans to borrow from other countries where they are based but away from the domestic location. Again, many foreign investors expressed their interest in investing in various firms within their countries and other countries where the company operated as a multinational. Since there were disparities in the currencies used by the local business and the foreign investors, calls and demands were made to ensure that neither of the two participants fell short of the portfolio (Hansen, 2010). A common way of understanding the financial sectors of both the local business and the foreign investors was required leading to the development of the International Accounting Standards and International Financial Reporting Standards for both parties (Follesdal, Wessel & Wouters, 2000).
Moreover, the investors themselves were confused on which firm or industry they should invest in since each of the firms and the industries in the business ten years ago had their own ways of reporting their financial information (Norton, Diamond & Pagach, 2006). There as a need for comparison between two or more firms or industries that was to aid in the making of informed decision within the global economy. This called for development of the International Accounting Standards and International Financial Reporting Standards that gave businesses the basis of presenting their financial statements in a way that comparison could be made that aided in the making of investment judgments within the global economy (Broadbent, Broadbent& Cullen, 2003).
3. Â Discuss how the requirements of international accounting standards have affected financial reporting for EU based companies, for both small and medium companies, and also for large companies. Â Include comments on the advantages and disadvantages of international accounting standards to the reporting companies, and to the stakeholders of the companies. Â (40 marks)
European Union based companies have been affected by the requirements of the International Accounting Standards for all the small, medium, and large companies (Follesdal, Wessel & Wouters, 2000). The European Union in 2000 announced that all the member states will be required to apply the International Financial Reporting Standards in the preparation of the consolidated financial statements especially of the listed companies from the onset of 2005 (Oracle White Paper, 2008). Since then Australia, New Zealand, and Israel have successfully adopted the system in the reporting of the consolidated financial statements. This has so far influenced the reporting of the financial information by the European Union.
However, the requirement only affected the listed companies within the European Union regulated stock exchange markets. Most small and medium companies are not listed in the European Union regulated stock exchange markets as compared to their large counterparts. This means that they are not compelled to use the International Financial Reporting Standards in the preparation of consolidated financial statements (Norton, Diamond & Pagach, 2006). Such firms are therefore required to convert their financial statements into those that follow the guidelines of International Accounting Standards, which has so far been changed to the International Financial Reporting Standards (Follesdal, Wessel & Wouters, 2000). This was to happen by 2005 meaning the firms were going to incur costs in converting such financial documents. The effect on this is that there will be increased overhead costs leading to reduction in the profits.
In addition, the adoption of the International Financial Reporting Standards as late as 2005 will require the firms small, medium, or large to have trained personnel in handling financial statements that are of International Financial Reporting Standards nature. As a result, there will be increased costs as well in either training personnel of acquiring already trained personnel for the purposes of accomplishing the requirements for the reporting of the financial information as required by the union (Broadbent, Broadbent& Cullen, 2003). The increased costs will lead to a reduction in the level of profits amongst the firms and this will affect the large companies more than it would to the small companies. This is because the latter has fewer financial records than the former.
Most of the firms have wasted some time in converting the financial statements to match the requirements of the International financial Reporting Standards since the process of conversion is not only costly but time consuming as well (Oracle White Paper, 2008). The result of this is that majority of the small companies have been able to perform better during this conversion period as compared to their medium and large counterparts. This has been necessitated due to the amount of data that the two sects of firms have (Follesdal, Wessel & Wouters, 2000). There has been reduced production during this period of conversion and this has been very costly to the firms as well.
The incorporation of the International Financial Reporting Standards within the European Union has allowed for direct cross-border comparisons of financial statements. It is believed that the International Financial Reporting Standards provide a more realistic concept and figures of profits and losses. This has exposed the weaknesses of firms, small, medium, and large within the various industries in the European Union sector. This comparison has given a way for all the firms within various industries of the European Union to be able to increase their productivity and expansion strategies. It has also led to discovery of weaknesses of some companies thereby enhancing the development of competitive advantage within those firms.
The application of the International Financial Reporting Standards have opened up a window for all the companies within the European Union to enhance transparency, comparability, and it has facilitated the European merger and acquisition thereby achieving competitive advantage and thus increasing the profitability through reduction in the competition level and increased market share (Norton, Diamond & Pagach, 2006). The International Financial Reporting Standards with all the firms of the European Union irrespective of their sizes have resulted into capital formation thus affecting the output within the same firms. The increased outputs have resulted into achievement of high sales thus resulting into the increased productivity and profitability.
International Financial Reporting Standards have enabled the European Union firms and industries to look at the business matters on the perspective of the investors. The universal presentation of financial information of the various companies within the firms and industries of the European Union has prompted the international investors into better understanding of the financial information of the firms thus enabling the management of the firms and their stakeholders to grow international shareholders (Broadbent, Broadbent& Cullen, 2003). The growing of international shareholders has resulted into globalization of the firms and this has been very useful in achieving even higher profits and expansion as well as the growth strategies.
In conclusion, the developments of the International Financial Reporting Standards have had positive impact on various organizations irrespective of their sizes. It is through the International Financial Reporting Standards that many firms are now enjoying the economies of globalization and some are enjoying economies of large scale operations.