International Accounting Standards Board - Term Paper Example

Kum Hyceinth Njuh Academia Research Order 155968 ' 2nd March 2007 THE EFFECTS ON COMPANIES ADOPTING IAS/IFRS FOLLOWING RECENT REVISION OF IAS 2 INVENTORIES BY THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB). INTRODUCTION International Accounting Standards (IAS) are a set of accounting standards promulgated by the International Accounting Standards committee (IASC), which are intended to be used as a basis for cross-border capital raising and listing in global financial markets. (Asbaugh, 2001). The IASC was set up in 1973 by the professional accounting bodies of nine countries with two principal objectives including: 1) the formulation and publication of accounting standards to be observed in financial statements and to promote their worldwide acceptance and; 2) To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements. (Salter et al, 1996). The main goal of the International set of Accounting Standards is to standardise the financial and accounting method disclosures of firms in different nations. That is, if firms follow the same set of accounting standards, their external financial reports will provide more uniform disclosures and thus investors would make more use of the variables inherent in the financial statements. (Asbaugh, 2001). Also, firms and investors would benefit from financial statements prepared following an international set of accounting standards. (Asbaugh, 2001). In meeting with the afore-mentioned objectives, the European Union issued regulation 1606/2002 of July 19, 2002 requiring that all companies listed in the European Union and European listed companies in other countries to adopt international accounting standards in their Financial statements from 1st January 2005 onwards the regulation also gave member states the option to or permit the use of IAS and IFRS in the corporate annual accounts. A single set of standards including IAS 2 inventories had to be adopted by firms in the region and firms in other regions that are listed in the E.U. Non-E.U listed firms in other areas that permit or require the adoption of IAS/IFRS also adopted International accounting standards. The International Accounting Standards Board recently revised IAS 2. In accordance to this revision, the LIFO method of valuing inventories was completely faced out and only the First in First out (FIFO) and weighted average methods of inventories are to be used as from now henceforth. Following this revision, I predict significant effects on costs, profitability, taxes and firm value for firms adopting international accounting standards who previously applied the LIFO method of accounting considering that they are now required to use only the FIFO or weighted average methods of inventory valuation. I also predict significant difficulties in convergence with the U.S GAAP considering the fact that the LIFO method remains the method applied in the United States. Thus the International Accounting Standards Board will hardly achieve its goals of converging International Accounting Standards with U.S GAAP. One would expect a series of effects from changing from the old standards to the new standards either positive or negative. Most research on this topic has centred on different aspects of international accounting standards. For example Taylor and Jones (1999) studied how firms that claim to be using accounting standards refer to international accounting standards in their financial statements. This study provides evidence that almost all the firms in the study referred to international accounting standards in the footnotes to the financial statements but referred to international accounting standards in their audit reports only 50% of the time. Ashbaugh (2001) investigated the factors associated with non-US firms that voluntarily disclose their financial statements following either U.S GAAP or IAS. Examining the annual reports of 211 non-US firms listed in the London Stock exchange non-US firms are more likely to disclose their financial information following either U.S GAAP or IAS when their shares trade in more equity markets. Ashbaugh (2001) also found that more firms are likely to disclose IAS financial information when they participate in seasoned equity offerings and when U.S GAAP requires more accounting policies that what is required by the firms' national GAAP. Ding et al (2007) analysed the determinants and effects of differences in domestic and international accounting standards. Using an extensive list of differences between domestic accounting standards and international accounting standards to create two indices absence and divergence, and using a sample of 30 countries, their results show that absence is (mainly) determined by the importance of the equity market and ownership concentration, while divergence is positively associated with the level of economic development and the importance of the accounting profession, but is constrained by the importance of equity markets. Ampofo and Sellani (2005) in a study examining the differences between U.S GAAP and IAS conclude that U.S GAAP conclude that the similarities between U.S GAAP and IAS outweigh the dissimilarities and that movement towards harmonisation is bringing them closer and closer. They however, conclude that recommendation of IAS without regard to complexity of business environments, culture, legal and economics of the U.S is premature. From above one can see that there is a literature gap in that none of the studies has placed particular emphasis on how a particular International Accounting standard affects the firms that adopt IAS. I intend to bridge this gap by studying the effects of IAS 2 on a selected number of firms listed in the United Kingdom that are switching from the UK GAAP to International Accounting Standards and who previously applied the LIFO method in valuing inventories. METHODOLOGY. I intend to sample 30 firms from the London Stock Exchange, which have adopted International Accounting standards in preparing financial statements. The financial statements will be reformulated for each firm to reflect both the application of LIFO and FIFO and the weighted average methods for valuing inventory. This will enable comparison between the LIFO, FIFO and weighted average methods. To analyse the effects on profitability the financial statements of each firm will be properly analysed by calculating profitability ratios such as Asset Turnover (ATO), which measures the amount of sales generated with the total asset base, Return on capital employed (ROCE), which measures the efficiency and profitability of a company's capital investments, Return on Equity (ROE), which measures the profitability of the company and reveals how much money the company has generated from the money contributed by equity investors, Return on assets (ROA) also known as return on investment (ROI), which measures how profitable a company is with respect to its assets. The higher the above ratios, the better more profitable the company and the better its performance. Also I will prepare a questionnaire targeted towards top executives in these firms and auditors. The questionnaires will be structured such that the top accountants can express their views on how they see the controversy inherent in IAS 2. The questionnaires will be analysed using qualitative analysis and conclusions will be drawn based on these analyses. Based on the analysis of the financial statements and opinions expressed by top financial executives in the companies and auditors, we will be able to model the effects of the controversy inherent in IAS 2 Inventories. The above methodology is reliable in that it employs the basic tools for analysing financial statements, which are financial ratios. This implies that other researchers can perform the same study using different approaches and arrive at similar conclusions. The methodology is also valid because it collects data directly from the financial statements, which have been prepared in accordance with IAS, which is what we are about to test. Therefore the data set is valid for the problem to be investigated. Time Table For Project Activities Activity Length of Time Collection of data from London Stock Exchange One week Reformulation of financial statements and calculation of ratios for 30 firms Two weeks Preparation of questionnaire Two days Administration of questionnaires Two weeks Analysis of questionnaires One week Report of findings Three days Conclusion of study One day. BIBLIOGRAPHY Ampofo A., A., Sellani R., J. (2005). Examining the differences between United States Generally Accepted Accounting Principles (U.S.GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards. Accounting Forum. Vol. 29, Pp 219-231. Asbaugh H. (2001). Non-U.S firms' Accounting Standard Choices. Journal of Accounting and Public Policy. Vol. 20. Pp 129-153. Ding Y., Hope O., Jeanjean T. (2007). Differences between domestic accounting standards and IAS: Measurement, determinants and implications. Journal of Accounting and Public Policy. Vol. 26, Pp 1-26. Haverals J. (2007). IAS/IFRS in Belgium: Quantitative analysis of the impact on the tax burden of companies. Journal of International Accounting, Auditing and Taxation Vol. 16, Pp. 69-89. Salter S.B., Roberts C.B., J. Kantor. (1996). The IASC Comparability Project: A Cross-National Comparison of Financial Reporting Practices and IASC Proposed Rules. Journal of International Accounting and Taxation. Vol. 5(1), Pp. 89-111. Taylor M. E., Jones R. A. (1999). The Use of International Accounting Standards Terminology, a Survey of IAS Compliance Disclosure. The international Journal of Accounting. Vol. 34(4). Pp 557-570. Read More