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The impact of the International Accounting Standard on the Global Village
At the end of this study readers must be able:
Prepare a income statement and a statement of financial position in the business
Identify the factors on the global village with accordance to the international accounting standard
The following is the trial balance for Grace Ltd as at 30 April 2012.
Share capital: authorized and issued 200,000
Stock as at 30 April 2011 102,994
8% Debentures 40,000
Fixed assets replacement reserve 30,000
General reserve 15,000
Profit and loss account as at 30 April 2011 12,411
Debenture interest 1,600
Equipment at cost 225,000
Motor vehicle at cost 57,200
Return Inward 18,400
Carriage Inwards 1,452
Wages and Salaries 123,289
Rent, business rates and insurance 16,240
Discount allowed 3,415
Directors' renumeration 82,400
Provision for depreciation at 30 April 2011:
Motor Vehicles 18,200
Given the following information as at 30 April 2012, draw up a profit and loss account and a balance sheet for the year to that date:
The share capital consisted of $300,000 of $50 cents each and 50,000 12% preference shares of $ 1 each. The dividend on the preference shares was proposed to be paid as well as a dividend of 18% on the ordinary shares.
Accrued: rent $802; Directors' renumeration $6,000
Debenture interest Â½ year's interest owing.
Depreciation on cost: Equipment 20%; Motor Vehicles 25%
Transfers to reserves: General reserve $5000; Fixed assets replacement reserves $10000
TRADING AND PROFIT AND LOSS ACCOUNT
FOR THE PERIOD ENDED 30 APRIL 2012
Less Return Inwards
Less Cost of Sales
Add Carriage Inwards
Less Closing Stock
Cost of Goods Sold
Wages and Salaries
Rent, Business rates and insurance (16240+802)
Directors' renumeration (82400+6000)
Motor Vehicle 25/100*57200)
Add profits from last year
Transfer to General Reserve
Fixed Assets Replacements Reserve
Preference Share Dividend
Ordinary Share Dividend
Retaining Earning b/f
AS AT 30 APRIL 2012
Depreciation to date
Net Book Value
Less Current Liabilities
Non Current Liability
General Reserve (15000+5000)
Fixed Assets Replacement Reserve
N.B A balance of $30 dollars was short in the trial balance therefore the balance sheet is short by $30.
INTERNATIONAL ACCOUNTING STANDARDS
Discuss and analyze the importance of international accounting standards given that the world is fast becoming a global village.
The International Financial Reporting Standards (or the former International Accounting Standards - IAS) are adopted by the London-based International Accounting Standards Board (IASB).
In the past, international accounting standards (IAS)Â were issued by the Board of the International Accounting Standards Committee (IASC).Â
Since 2001, the new set of standards has been known as the international financial reporting standards (IFRS) andÂ has beenÂ issued by the International Accounting Standards Board (IASB).
IASC has no authority to require compliance with its accounting standards. However, many countries require the financial statements of publicly-traded companies to be prepared in accordance with IAS
Over the last two decades, the global financial landscape has undergone a significant transformation. These developments have been attributable, in part, to dramatic changes in the business and political climates, increasing global competition, the development of more market-based economies, and rapid technological improvements. At the same time, the world's financial centers have grown increasingly interconnected.
Corporations and borrowers look beyond their home country's borders for capital. An increasing number of foreign companies routinely raise or borrow capital in U.S. financial markets, and U.S. investors have shown great interest in investing in foreign enterprises. This globalization of the securities markets has challenged securities regulators around the world to adapt to meet the needs of market participants while maintaining the current high levels of investor protection and market integrity.
Our efforts to develop a global financial reporting framework have been guided by the cornerstone principle underlying our system of regulation -- pursuing our mandate of investor protection by promoting informed investment decisions through full and fair disclosure. Financial markets and investors, regardless of geographic location, depend on high quality information in order to function effectively. Markets allocate capital best and maintain the confidence of the providers of capital when the participants can make judgments about the merits of investments and comparable investments and have confidence in the reliability of the information provided.
As globalization works its way through local economies via deregulation and modern market reforms, there is a need for the convergence of local financial reporting standards with International Accounting Standard (IAS). But, in order to achieve greater transparency worldwide as part of a wider Global Accountability Framework (GAF) the fundamental institutions of a modern market economy must be put in place before the convergence becomes effective. A more effective corporate governance code and greater independence at listed Board of Directors level is also needed. Finally, the new GAF would need to embrace non-financial measures of effectiveness to provide corporations the basis to report on their social responsibility activities, while limiting the disclosure of financially sensitive corporate information. The latest developments in global commerce are likely to lead to a further wave in deregulation and market reforms in local economies. The demands for capital of growing businesses from the major capital markets of the world are dependent on the convergence of local Generally Accepted Accounting Principles (GAAP) with IAS. More plainly, those seeking to raise funds will need to have their local adoption of IAS converge with American GAAP, the reporting standards of the dominant capital market of the world for gone listing in the United States rather than follow accounting standards that International Accounting Standards The establishment of IAS alone is not sufficient to achieve the type of regional business growth that we may expect. However, the convergence of a worldwide IAS with that of the accounting standards of the U.S. capital market, will be of tremendous significance to effective capital flows. The U.S. Securities Exchange Commission (SEC) is increasing its involvement in a number of forums to develop a globally accepted, high quality financial reporting framework.
Over the years, the SEC has realized that foreign companies make decisions about offering or listing securities in the United States for a variety reasons. While many of these reasons are unrelated to U.S. regulatory requirements, some foreign companies cite a reluctance to adopt American.
Accounting practices as a reason for not listing in the U.S. These companies have they have not helped formulate. Therefore, accepting financial statements prepared using IAS standards without requiring reconciliation to U.S. GAAP could induce cross-border offerings and listings in the United States. However, other factors could continue to deter foreign access to the U.S. markets. For example, some foreign companies have expressed concern with the litigation exposure and certain public disclosure requirements that may accompany entrance into the U.S. markets. Foreign companies also may be subject to domestic pressure to maintain primary listings on home country stock exchanges.
Currently, the SEC will not permit a foreign company to trade their overseas stock on the New York Stock Exchange (NYSE) without first issuing financial statements in accordance with GAAP. This cumbersome and expensive translation requirement severely limits foreign firm access to U.S. markets and U.S. access to foreign investment opportunities. The investment potential is tremendous, as currently only about ten-percent of the over 2,000 major foreign companies list on the NYSE. Many believe that unless U.S. policy is adjusted the U.S. stock market could lose world prominence to London or other European exchanges.
Thus, issuers wishing to access capital markets in different jurisdictions must comply with the requirements of each jurisdiction, which differ in many respects. Different listing and reporting requirements increase the costs of accessing multiple capital markets and create inefficiencies in cross-border capital flows. The SEC is working with other securities regulators around the world to
reduce these differences. To encourage the development of accounting standards to be considered for use in cross-border filings the SEC has been working primarily through the International Organization of Securities Commissions (IOSCO), and focusing on the work of the International Accounting Standards Committee (IASC).
Yet global accounting policies may soon change as key accounting rule makers worldwide work toward the goal of convergence. At the forefront is the IASC, committed to the development of accounting standards that will bring consistency to accounting policies worldwide. The SEC is willing to compromise and last year accepted three international accounting standards on cash-flow data, the effects of hyperinflation, and business combinations for cross border stock filings. Still, the general consensus seems to be that before any real progress can be made in the area of convergence, international standard setters need more resources and the active participation of the major parties involved.
A number of factors have contributed to this convergence. Specifically, large supranational corporations have begun to apply their home country standards in a manner consistent with IASC standards or GAAP. In addition, while the accounting standards used must be high quality, they must be supported by an infrastructure that ensures that the standards are rigorously interpreted and applied, and that issues and problematic practices are identified and resolved in a timely fashion. Elements of this infrastructure include: effective, independent and high quality accounting and auditing standard setters; high quality auditing standards; audit firms with effective quality controls worldwide; profession wide quality assurance; and active regulatory oversight.
The term corporate governance refers to the processes and structure by which the business and affairs of the company are directed and managed, in order to enhance long-term shareholder value through enhancing corporate performance and accountability, whilst taking the interests of other stakeholders. The need to adopt an effective corporate governance code is essential as we confront the waves of globalization A useful first step in creating or reforming the corporate governance system is to look at the principles laid out by the Organization for Economic Development and Cooperation (OECD) and adopted by its government members.
These include: the rights of shareholders; the equitable treatment of shareholders; the role of stakeholders in corporate governance; disclosure and transparency; and the responsibilities of the board of directors. The guidelines provide a great deal of detail about the functions of the board in protecting the company, its shareholders, and its stakeholders. These include concerns about corporate strategy, risk, executive compensation and performance, as well as accounting and reporting systems.
Globalization and the advent of new technologies have dramatically changed the way business, government and society are organized. A key driving force of these changes is a new business model. This new business model is a philosophy of human organization based on conscious teamwork, networking, motivating people and reducing waste, including the cost of under using human capabilities, and to build the infrastructure for the creation of knowledge.
Distinctions in the classification between the old and new economy business model may be somewhat artificial, but what is significant is that IAS and the GAF should make the changed relationships and strategic alliance in corporations more transparent.
The way in which developing countries respond to the current forces driving globalization will have a major effect on their standard of living, growth rates, quality of life, and development process in the coming decades. In countries where institutions are not deeply rooted, shifting to the new business model may meet less resistance than in countries where those institutions are more developed. Indeed, in countries where corporate and political governance structures are very rigid (typically in conflict or tension-ridden societies), adopting the new business model is likely to be difficult. As a result, these countries may fall even further behind during this wave of globalization than they did during the previous one. Some developing countries are flexible and can adapt quickly, but they may face obstacles instituting changes. In short, whether or not developing countries will benefit or lose from the new business model and its competitive strength remains an open question. It depends largely on how the governments of these countries respond.
The wave of the future is in flexible production and flexible organizations. In that regard, many developing countries should continue to improve the quality of their educational systems and their physical infrastructure (notably telecommunications and transportation), which will enable them to compete more effectively in local and regional markets and, in the case of some industries, in global markets.
Because of increasing cross-border capital flows, we and other securities regulators around the world have an interest in ensuring that high quality, comprehensive information is available to investors in all markets. We stated this view in 1988, when we issued a policy statement that noted that "all securities regulators should work together diligently to create sound international regulatory frameworks that will enhance the vitality of capital markets."1 We have applied this approach in a number of instances, including our recent adoption of the International Disclosure Standards developed by the International Organization of Securities Commissions (IOSCO) for non-financial statement information.2 Our decision to adopt the International Disclosure Standards was based on our conclusion that the standards were of high quality and that their adoption would provide information comparable to the amount and quality of information that U.S. investors receive today.
Currently, issuers wishing to access capital markets in different jurisdictions must comply with the requirements of each jurisdiction, which differ in many respects. We recognize that different listing and reporting requirements may increase the costs of accessing multiple capital markets and create inefficiencies in cross-border capital flows. Therefore, we are working with other securities regulators around the world to reduce these differences. To encourage the development of accounting standards to be considered for use in cross-border filings, we have been working primarily through IOSCO, and focusing on the work of the International Accounting Standards Committee (IASC). Throughout this effort, we have been steadfast in advocating that capital markets operate most efficiently when investors have access to high quality financial information.
However, ensuring that high quality financial information is provided to capital markets does not depend solely on the body of accounting standards used. An effective financial reporting structure begins with a reporting company's management, which is responsible for implementing and properly applying generally accepted accounting standards. Auditors then have the responsibility to test and opine on whether the financial statements are fairly presented in accordance with those accounting standards. If these responsibilities are not met, accounting standards, regardless of their quality, may not be properly applied, resulting in a lack of transparent, comparable, consistent financial information.
Accordingly, while the accounting standards used must be high quality, they also must be supported by an infrastructure that ensures that the standards are rigorously interpreted and applied, and that issues and problematic practices are identified and resolved in a timely fashion. Elements of this infrastructure include:
effective, independent and high quality accounting and auditing standard setters;
high quality auditing standards;
audit firms with effective quality controls worldwide;
profession-wide quality assurance; and
active regulatory oversight.
It is simple to state that we need more transparency and accountability. In reality, the GAF will need tremendous efforts from all parties. Prospering in the21stcentury will require a multi-lateral dexterity in coordinating the activities of the players, both the workers and the owners, and balancing the needs of different stakeholders, the government and regulators. These players must also develop a timely report card that is understandable to all in both financial and non-financial measures of effectiveness.
For effective implementation, the adoption of an International Accounting Standard should provide an accurate and honest image of the company's financial situation and performance, correspond to European public interests and meet the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management. The Commission is consulting with the Committee of the European Securities Regulators (CESR) to develop a common approach towards enforcing these rules.
The system is to be subject to an endorsement mechanism with a two-tier structure:
a regulatory level, with an Accounting Regulatory Committee made up of representatives from the Member States and chaired by the Commission. On the basis of the Commission's proposals, this Committee decides whether the IRFS are to be adopted. Its aim is to ensure full transparency and accountability vis-à-vis the Council and Parliament;
a technical level, with an Accounting Technical Committee, the European Financial Reporting Advisors Group (EFRAG), made up of accounting experts from the private sectors of several Member States. This Committee provides the support and expertise needed to assess the IFRS and to advise the Commission on whether or not to adopt the IFRS being considered.