International Accounting Standards Issues - Essay Example

INTERNATIONAL ACCOUNTING STANDARDS PART PROBLEMS The financial ments are generally composed of a) ment of financial position or some countries call them balance sheet and the b) statement of operations or some countries call it income statement. These two financial statements are used by many sectors which includes the customers, creditors, suppliers, managers, board of directors, employees and labor unions, banks, government regulatory agencies and government tax agencies. The company's management would like to use the balance sheet and income statement in order to determine if the company has been doing well and in accordance with benchmarks and budgets that was approved for implementation. Company's management also wants to determine how it fares with their competitors located both within its country borders and also companies located outside its borders. When comparing its financial position and results of operations for the last year or years, competitors located in the same country like the United Kingdom can be easily compared and contrasted. A little difficulty arises when the financial statements of competing companies are compared and one company is located in the United Kingdom and the other stiff competitors are located in other countries like the United States, Japan, Canada, Brazil, China, India etc. There are many problems that will arise when we compare the statement of operations and the statement of financial position of competitors with residence in many different countries. They say that accounting is the language of business. Just as misinterpretation could be eliminated if people from Germany and Spain understand each other, misunderstandings and variances in the interpretation of the balance sheet and income statement are due to the different financial statement standards and methods of reporting which includes costing, billing and cost distributions. One major problem is that each country has researched and approved own generally accepted accounting principles individually. Generally Accepted Accounting Principles (GAAP) are the widely accepted set of rules, conventions, standards, and procedures that are used for reporting financial information which are researched and established by the Financial Accounting Standards Board of each country. (Sanella, 1991) One example of a generally accepted accounting principle is the United Kingdom's generally accepted accounting principle as to when to record a transaction as cash or receivable or another accounting data. Another problem is that the individual financial data ( Belkaoui, 1999) reported in the financial statements are cash inflows and cash outflows that are inherent and unique to each country. For example, average daily salary paid for the factory worker in competing companies will have a big disparity because salaries of production personnel in third world countries like India are estimated to be ten times lower than the average daily wage of a production worker in the Great Britain or Germany. Another problem is that the modes of transporting the goods in India or Brazil is not as advanced or fast as the mode of transportation in the United Kingdom or the United States. As of this time, there is no one size fit all when it comes to global accounting standards. In relation to this topic, The European Union which is a conglomeration of individual independent states in Europe, including the United Kingdom, has come up with the European Court of Justice that gives decisions on cases within the European Union community even though each country has its own courts of law. The Tax consultants, accountants and financial statement analysts are at odds when comparing electricity, salary, rent, asset amortization and depreciation, assignment of values to assets between countries. We know that the standard of living in London is very much higher than the standard of living in China. Each accountant, financial statements analyst and tax consultant has to creatively establish his own system of cost accumulation in order to compare the income, expense, asset, liability and capital data between and among competing companies. The accountants from each of these countries that certify that the financial statements have are true or fairly presented, in reality, have their own biases or interpretations of the truthfulness or fairness of the financial statement presentations. In order to allow a comparison and contrasting of financial statements between and among different competing companies located in many countries, hard work has to be used to reach a best effort. The certified balance sheet and income statement contain the data of assets, liabilities, capital, expenses, costs and income which are used by investors, creditors, financial statement analysts and others for their decision making activities. One way to standardize the variances in data items, basic analysis of the balance sheet and income statements in order to facilitate comparison and contrasting is to use fundamental analysis. An example of fundamental analysis is the comparison between the percentage increase of expenses and income between and among competing companies that take up their residence in many countries. To solve this problem of translation and interpretation variance between and among each country's financial performance and position on an international scale, The countries of the European Union decided to impose on is members the VOLUNTARY transition from the application of the generally accepted accounting principles method of reporting the balance sheets and income statements to the new international reporting standard using accounting principles and procedures enumerated in the International Financial Reporting Standards of reporting (IFRS). The transition from the TAX ORIENTED generally accepted accounting principles, which is unique to each country, to the UNDERSTANDABILITY based international financial reporting standards has been set to January of the year 2005. Some countries can defer their compulsory implementation of the international financial reporting standards until the year 2007. The Accounting Standards Board stated that European companies that have given debt securities on a regulated stock market of member states. Another group that is allowed the privilege to delay the implementation of the international financial reporting standards until 2007 is the group of companies that are presently using other international accounting standards when the date of implementation of the international financial reporting standards should start. This is for the aim of listing its stocks in the stock exchanges outside of a regulated market in the European Union. One such international accounting standard is the United States generally accepted accounting principles in the preparation of their published accounts. Upon implementation of the international financial reporting standards (IFRS) in January of the year 2005, there are issues that must be considered in the change from to the new reporting standard when the published accounts and consolidated financial statements are issued. One issue that must be taken in consideration is that there must be legislation or regulation or law that each unique European Union member state approves. The other issues that must be taken up when the international financial reporting standards is put into place are whether the implementation of the new reporting standard will reduce the cost of capital. Another issue relevant to the implementation of the new reporting standard is whether there is a significant disposal, acquisition or share issue into a market that knows international financial reporting standards of does not use a European Union member state's generally accepted accounting principles( Van Riper, 1994). Another issue to consider is whether the internal cost of adopting the international financial reporting standards will be lesser than waiting until the year 2005. The next issue to consider is whether the international financial reporting standards will give a clearer view of the underlying economies and also what the company expects as a future value than the generally accepted accounting principles( Bloom et al, 1990, Opportunity Cost in Finance and Accounting, Quorum Books, London. In a related topic, some countries use International Accounting Standards presently. International Accounting Standards is being used by many companies in countries around the world. Many of these companies are located in Switzerland. Many Companies in Germany has also implemented the International Accounting Standards just like man companies located in Eastern Europe. International Accounting Standards are widely used by companies located in the Caribbean, made compulsory in Russia, made compulsory in Australia in the year 2005, Malaysia and Singapore. There are requirements which must be included in the initial adoption of the international financial reporting standards. The International Accounting Standards Board must issue an exposure draft for the initial implementation of the IFRS. The exposure draft shows the guidelines for the simple steps that companies will do when they start the initial implementation of the IFRS. The exposure draft will indicate the steps to take to ensure that there is comparability between two or more entities. The exposure draft mentions that the each IFRS in forced in the prior year accounting period is applied to each prior year transaction depending on the time of occurrence. The transitional rules of the international accounting standard particularly each new and revised standard is applied to the find the beginning balances. The companies can proceed with this approach or they can adopt the new alternative. The new alternative is each international financial reporting standard used at close of the accounting period's balance sheet in the initial international financial reporting standards published accounts will be adopted for the entire accounting period stated in the balance sheet and incomes statements. This also includes the many priors years used in comparison. A good example of this new option on previous accounting periods is as follows. "The date of first application for those that produce audited financial statements containing one year of comparatives with a 31 December 2005 year end will be 1 January 2004. Thus the same standards will be applied throughout 2004 and 2005. Some companies, such as US registrants, who provide two years of comparative data, will need to start collecting IFRS information from 1 January 2003."(PricewaterhouseCoopers, 2002) The option here is used to relieve the big burden that arises from restating old business combination transactions and when old records of historical cost of fixed assets are recovered. Most chief financial officers are on the side of the group that says companies can adopt the international financial reporting standards (Friedman, J., 1994) earlier than the year 2005 but the choice of companies to choose whether to use the GAAP or IFRS is not the company's free choice. The company must follow the government's legislation or statutes. Therefore, if the government says that the company must start using the IFRS, then the executive officers of the company must implement the legislation such the 2005 international financial reporting standards. Any company, before the year 2005, can implement the IFRS earlier if they determine that such change to the international financial reporting standard will reduce the company's cost of capital. Another reason for the company's preference for earlier implementation of the international financial review standard is that the new reporting standard will allow the transaction that is being planned to push through. Another reason that companies have for the early use of international financial reporting standards is that the new reporting standard will prevent the unwanted takeover of the company by unfriendly persons. A company that uses a national GAAP that is similar to the accounting principles espoused by sections of international financial reporting standards will get a big approval rating from its investors and other stakeholders. The stakeholders will give the company a high rating for implementing the IFRS because the main concern of this new reporting standard is TRANSPARENCY. When there is transparency, there is lesser chance for the company to hide some unwanted transactions or published accounts from the public. IN CONLUSION, X plc, a multinational company that is registered in the UK, can easily compare its financial performance and position with its 30 other multinational companies who are competitors in the same industry but based in other countries on an international scale by implementing the European Union's Instructions that all its member states should shall replace their TAX oriented GAAP with the new IFRS reporting standards. Many EU member states have started implementing the transition starting January 2005. Other member states asks to defer their IFRS transition until January, 2007. Finally, other countries outside the European Unions must follow the EU lead. PART 2 SOLUTION In the European Union's aim to have one size that fits all when it comes to global accounting standards in order for X plc to compare its financial performance and position (Someya, K., 1988) on an international scale with 30 other multinational companies who are competitors in the same industry but based in other countries, Companies are given the option to change to the International Financial Reporting Standards now or to continue to use the prevalent United Kingdom GAAP. Previously, the implementation of the IFRS was only confined to the United Kingdom companies that had their shares of stocks listed in the United Kingdom Stock Exchanges. But there is a strong clamor that all other United Kingdom companies, not only the United Kingdom companies listed in the Stock Exchanges, are strongly advised to change their method of accounting to follow the procedures detailed in the IFRS. The NEW International Financial Reporting Standards (IFRS) shows the significant change in the presentation of Published Accounts which basically includes the Balance sheet, the Income statement and Statement of cash flows. The Accountants and financial managers in many countries like the United States, Canada and others have grouped together to come up with generally accepted accounting principles. The generally accepted accounting principles states detail what items will be recorded as cash, furniture's and fixtures, buildings, equipment, labor wages, sales, sales returns, sales discounts, net sales, inventory beginning, inventory end, purchases, accounts payable, notes payable, long term notes payable, and items that are included in the stockholders' equity portion of the balance sheet. The International accounting body called International Financial Reporting Standards Board, which is composed of accounting experts from many countries, has come up with the International Financial Reporting Standards. This supersedes the Generally Accepted Accounting Principles (BelKaoui R., 1999) of all countries that are required to present published accounts. The main reason here is because, now that we are entering a borderless economy, an interested investor from the United States can just get the published accounts of companies listed in the United Kingdom stock exchanges and makes his or her investment decision (Bouckaert et al, 1996) by just looking at the received published reports. Therefore, the main reason for the compulsory replacement of the generally accepted accounting principles ( Cheatham, 1993) with the international financial reporting standards is UNDERSTANDABILITY. Just as in any environment, when changes in policies or procedures are implemented, there will always be people who will accept the changes in policy or procedure with a good heart. But there will also be some people who will try to prevent or forestall the implementation of the new changes Therefore, the change from the generally accepted accounting principles to the international financial reporting standards will be accepted by many and will also be refused or be delayed in the implementation by some quarters. Usually, the old people are resistant to any change because they have to learn the new method or procedure or policy. The young employees or workers will happily accept changes in the new policies, guidelines or procedures with an open heart because they feel that change is similar to independence. (http://www.ifrs.co.uk) Although many companies have followed the new accounting guidelines, there are still many companies who find it difficult to leave behind the old generally accepted accounting principles and to use the new International Financial Reporting Standards. But still, although these companies are slowly getting used to the new accounting standards of recording. N the past twelve months, UK-listed companies have performed magnificently against all the odds, but the implementation IFRS policy path hasn't always been a smooth one. (http://www.pwc.com/Extweb/insights.nsf/docid/FC8E0D1EC92F94E380256ED3003F4741) Starting this 2005, many companies have now converted their published accounts that were issued under the United Kingdom Generally Accepted Principles ( Van Riper, 1994) starting with the year 2004 and even going back to other previous years of operations. After the change to the International financial reporting standards financial reporting process starts this year 2005, then the change will be felt as it affects the organizational structures, processes, systems, data capabilities and it will even be good for the people or employees who are flexible enough to accept the new financial reporting changes. As for the other employees who feel they are already well entrenched in the prior generally accepted accounting principles, it will surely be an uphill battle to convince them of the advantages of implementing the new financial reporting standards. As the saying goes, nothing is permanent in this world except change. (http://www.ifrs.co.uk/index.html) Vodafone, a well known mobile network company started the implementation of the new international financial reporting standards. This change in reporting standard has benefited the communications company in a grand scale. The communications company Vodafone generated a very big loss of 1.9 billion or US$ 3.6 billion loss, one of the biggest losses in United Kingdom history when it used the previous generally accepted accounting standards. After embedding the new International Financial Reporting Standards, the big turn - around occurred. The huge losses were translated to a 4.5 billion profit or US $ 4.5 billion profit. This huge one hundred eighty degree turn was because of one of the accounting principles included in the International Financial Reporting Standards which states that the amortization of goodwill change is not a required inclusion under the new International Financial Reporting Standards whereas in the prior United Kingdom Generally Accepted Accounting Principles standard, the amortization of good changes is a compulsory reporting requirement. But again, if the company will teach the stock exchange financial analyst (Laulajainen, 2003) the nuances and peculiarities of the change from United Kingdom Generally Accepted Accounting Principles ( Bloom et al, 1994) to International Financial Reporting Standards, then the stock market share prices will not be increased or decreased. Another company that has changed its financial reporting standard from generally accepted accounting principles (Guttman, R., 1989) to international financial reporting standards is the Newcastle, United Kingdom based NORTHERN ROCK. The share price went down from 23 p in Jan 26 when the IFRS was put into place. As a result of the change to International financial reporting standards, the earnings per share went to 12p because all European Companies that sell their stocks in the United Kingdom stock exchanges had to restate their published reports starting the year 2004 using the accounting principles enumerated in the International Financial Reporting Standards. According to All-star Wilson, an Ernst & Young partner, the changes in the share prices caused by implementation of the international financial reporting standards is due to the misunderstanding that the financial analyst had of the change from the United Kingdom Generally Accepted Accounting Principles to International Financial Reporting Standards. Under the International Financial Reporting Standards, transparency is the major criteria for reporting published accounts as compare to the United Kingdom generally accepted accounting principles standard. Since the stock market analyst fails to interpret and understand the new reporting scenario, they feed the investors wrong or lacking information. This wrong or lack of information then discourages the investors to invest the company listed in the stock exchange using the international financial reporting standards. The wrong interpretation of the financial analyst will also encourage the present investors of companies listed in the United Kingdom stock exchanges to divest their investments in the company; thereby bring the stock market prices down faster. This only shows that the companies that have been required to change their reporting standards to the new international financial reporting standards must contact the stock market financial analyst (Heely, J., 1993) and make him understand true effects of the change to the new published account reporting standards. The financial analyst must also be informed of the many performance factors used in the new reporting standard. In return, the companies must also think of better ways to use the new yardsticks in the international financial reporting standards environment so that the published reports will not be grossly miscalculated or misreported to the users of the published accounts. (http://www.ironthenet.com/newsarticle.aspcurrent=1&articleID=3844) The European Union passed a regulation making it compulsory for European Union Companies selling the stocks in the Stock Exchanges to implement the new International Financial Reporting Standards starting in the year 2005 when the issue their financial statements (Sannella, 1991). This pressing change in published accounts reporting affects over seven thousand companies in the European Union who have been using the UK GAAP. Some companies are asking guidance as to the intricacies of implementing the international financial reporting standards. The international financial reporting standards are the one and only international accounting standard that must be used by all countries in the world. The main criteria of the IFRS is TRANSPARENCY. Some users of the financial statements are the suppliers, the creditors, the customers, the employees. Therefore, transparent financial statements will be the investors' trust in the company and there is a strong possibility that the investors will increase their money investments in the companies listed in the United Kingdom stock exchanges. The IFRS are the products of the researches done by the International Accounting Standards Board. The European Union requires that all companies incorporated in any of its European Union member states (Sannella, John, 1991) that have their securities traded in the stock exchanges under Article 1 (13) of Council Directive 93/22/EEC and Council Directive 89/829/ECC to use the IFRS reporting method. The Accounting Regulatory Committee sanctioned the immediate implementation of the IFRS starting January of the year 2005. Some companies are allowed by the Accountings Regulatory Committee to delay the implementation of the new International Financial Reporting Standard ( Hickman, 1992) until the year 2007. The new regulation (Gamer et al, 1992) allows companies not listed in the stock exchanges and parent company accounts within some of the European Union member states, which includes the United Kingdom, ( Draper et al, 1988) with the preference to delay the imposition of the new IFRS until the year 2007. Developments in each European Union country in relation the implementation of the IFRS are many. One development is in the European Union countries (Borrus et al, 2001) of Austria, Belgium, Finland, and Germany the new financial reporting standard can already be implemented on their published accounts. In the European Union country Greece, the IFRS will be imposed in the year 2003. In France, the IFRS will be implemented when the new legislation has been made into law. In the EU member states Luxembourg and Netherlands, the IFRS will be implemented after legislation has been approved. In the EU member states Denmark, Ireland, Sweden and United Kingdom, the IFRS will be presented as national accounting reporting standards starting in the year 2005. On the contrary, there are presently no plan or intentions that the IFRS will replace the GAAP (Lewis, R., 1993) in the EU countries of Italy, Portugal and Spain. Nations in the European Economic Area (EEA) have also presented legislation for the immediate implementation of the IFRS. Companies that have been incorporated and sell shares of stocks in the stock exchanges in Iceland and Norway will also introduce related regulation for the immediate implementation of the IFRS. In the European Union, the implementation of the IFRS started last January 1, 2005. The new started will be used in the consolidated financial statements (Borrus et al, 2001) during this accounting period. This means that the published accounts must be presented for the first quarter, January to March, 2005 and the published accounts for the semi annual period, January to June, 2005 and the financial statements (Cottell et al, 1990) for the annual period January to December 2005 will be presented using the new IFRS. The public's increased confidence in the implementation of the IFRS is helped by the fact that the financial analysts assigned to help the stockholders and prospective investors on the nuances and effects of changing from GAAP to the IFRS (Belkaoui, 1999) IN CONCLUSION, by changing its reporting methods and procedures from their TAX oriented GAAP TO the better UNDERSTANDABILITY oriented IFRS, one size fits all when it comes to global accounting standards. BIBLIOGRAPHY Sanella, A., 1991, The Impact of GAAP on Financial Analysis: Interpretations and Applications for Commercial and Investment Banking, Quorum Books, London Van Riper, R., 1994, Setting Standards for Financial Reporting: FASB and the Struggle for Control of a Critical Process, Quorum Books, London, 1994 Bloom et al, 1994, The Schism in Accounting, Quorum Books, London Bloom et al, 1990, Opportunity Cost in Finance and Accounting, Quorum Books, London, 1990 BelKaoui, R., , 1999, Value Added Reporting and Research: State of the Art, Quorum Books, London Guttman, R., 1989, Reforming Money and Finance: Institutions and Markets in Flux, M. E. 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