International corporate reporting issues - Essay Example

? INTERNATIONAL CORPORATE REPORTING ISSUES (BMA 0056) Fahad Omar Bawazir U0969912Table of Contents INTERNATIONAL CORPORATE REPORTING ISSUES (BMA 0056) 1 Fahad Omar Bawazir 1 U0969912Table of Contents 2 An Overview of International Accounting and US GAAP Standards 3 Barriers to Adoption of International Accounting Standards 7 Conclusion 11 References 12 An Overview of International Accounting and US GAAP Standards 3 General Influencing Factors in Accounting Standards for the United States…………………….3 Barriers to Adoption of International Accounting Standards 7 Comparative Study of IAS and US GAAP 8 Conclusion 11 Reference 13 Bibliography 2 An Overview of International Accounting and US GAAP Standards “Accounting provides useful information to decision makers, thus as the business environment has changed so have the accounting standards that govern the presentation and disclosure of information. International Accounting Standards are central to this concept” (Swami, n.d.). Starting in 1973 until the year 2000, the IASC introduced the International Accounting Standards. In the year 2001, the International Accounting Standard Board replaced IASC (Deloitte, 2010). Since that time, a number of International Accounting Standards have been amended. The objective of this standard is to frame the foundation for the presentation of financial statements. The standard is to ensure the compatibility with the company’s financial performance in previous years as well as with that of its competitors. US GAAP is the framework that offers Generally Accepted Accounting Principles, which are used by United States organisations or the companies listed on Wall Street. This set of standards is developed by the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants. The framework is a combination of authoritative standards introduced by the responsible authorities, as well as the accepted ways to carry out accounting and reporting activities. These standards are constructed solely by input of US organisations rather than any outside influences. General Influencing Factors in Accounting Standards for the United States The key objectives of accounting standards are identification, measurement, and reporting of financial information of the organisational entities to the interested stakeholders. Financial accounting is a process culminating in the preparation of the financial reports of the organisations. These are done for the use of both the internal and external stakeholders. These financial statements include balance sheets, income statements, and statements of the owner’s equity and cash flow situation including assets and expenses. In the United States, the most significant source of influence on accounting standards is politics. The most substantial factor in the political arena is user groups. These groups include the parties most affected by accounting standards, rules, and regulations. “Accounting standards are as much a product of political action as they are of careful logic or empirical findings” (Wiley, 2002, p.14). These groups of stakeholders require accounts and reports regarding company finances which are essential to successful business planning and strategizing. Groups know the best way to influence these standards in order to have a more favourable outcome financially is to participate in the framing of those same structures or to try to influence or persuade the authorities more directly responsible for the formulation and amending of the standards. In the US there are many authoritative bodies responsible for the formulation and development of the generally accepted financial standards; FASB is the significant and major contributor in this development. Undoubtedly, the board faces intense amounts of pressure and efforts to incorporate and influence the changes in the present standards and in the development of new ones. Moreover, the situation gets complicated with the involvement of two parties, where one party wants to incorporate the changes quickly and decisively, while the other group would like to see the changes move at a much slower pace. Here develops a clash of two high powers crossing over from the political world to the financial. Investors also can pay enough attention to the accounting changes if those changes incorporate enough variation in the profitability. For instance, changes in the accounting and reporting of goodwill of an organisation can affect the investors. Prior to the changes being incorporated, goodwill was required to charge the same against revenues over a time period. According to the new rules, organisations are not required to write off this cost on a systematic basis. The impact of this way of accounting can impact on the bottom line of a number of organisations. For instance, “due to no goodwill amortization, the estimation of the increase in the income of International Paper increased by 21 percent” (Please include the information for the citation used for this information) Accounting fraud – the failure of accountants to fulfil the expectations of the stakeholders – has always been quite influential when it comes to incorporating changes such as bringing in new amendments or new regulations. Accounting scandals in companies like Enron, Xerox, WorldCom, Cedant, Sunbeam and Rite Aid have attracted the attention of political as well as financial authorities. In the wake of incidents, in the year 2002, a new legislation named the Sarbanes Oxley Act was enacted to increase the resources for the Security Exchange Commission (SEC) to combat fraudulence and curb out poor reporting practices. Regulating and controlling accounting practices in such a way is important to guaranteeing accurate financial information in order to avoid theft of money and bankruptcy of business caused by those in influential positions who mishandle stakeholder funds. The commission has also increased its efforts by approving new auditor independence rules and introducing materiality guidelines for reporting of financial data. According to the rules, the auditor partner is required to rotate every five years. Added to this, the Sarbanes Oxley Act also incorporated changes in the institutional structure of the accounting profession. Undoubtedly, the act has enforced and established auditing, quality control and independent standards and rules. Economic consequences always have an influential role in the formulation and development of financial accounting rules and regulations. In this context it refers to the impact of accounting reports on the wealth position of the issuers as well as of the users of the information from financial statements and the decision making behaviour emerging from the same. The emerging behavioural changes among the users of financial information can have significant changes with regards their perspective of the enterprises. The financial performance of the organisations can be significantly affected by their future decisions. However, it would not be wrong to say that the majority of the changes have come due to the fraudulent activities in the accounting and reporting of financial information. According to the Sarbanes Oxley act, CEOs and CFOs must not include bonuses or profits when there is an accounting restatement. The company’s financial statements are required to be certified as accurate and complete by the CEOs and CFOs of the organisations. The audit committee must consist of independent members and the members are required to be of excellent financial expertise. A set of ethical codes must be in place for senior officers in the accounting and finance department (Wiley, 2002). Ethics are another important factor when influential in developing financial accounting standards. As business gets more competitive every single day, concentration on maximisation of the bottom line and stress on short term, maximum results have put accountants in an environment of conflict and pressure. These pressures sometimes put the accountants in a situation where technical expertise may not be enough to give them the correct solutions to their problems. The questions like ‘what should be done’ cannot be answered by simply following the GAAP rules and therefore, doing the right thing and making the right decision is not always easy. As a result, ethical considerations are a significant part of the formulation and development of financial accounting standards in United States. Barriers to Adoption of International Accounting Standards The United States has recognised the necessity to introduce global standards which meet the accounting and reporting requirements of financial information worldwide. In 1973 the International Accounting Standards Committee (IASC) was formed. In the same year, FASB was established to narrow down the areas of divergence between the accounting and financial standards of different countries. The objective of the establishment of standard setting by IASC is to work generally for the enhancement and harmonisation of accounting rules and regulations, standards and procedures related to the presentation and reporting of financial information. However, eliminating the difference is not an easy task. The objectives of financial reporting in the United States are quite different from that in the other countries. The structures of institutions are not comparable and strong national tendencies are also omnipresent as the barrier to adopting the international accounting standards in the United States. Since the inception of the IASC, there have been many changes, including the inception of IASB with the restructure of the IASC. The IASB has a structure which is quite similar to the structure of the FASB. Moreover, it cannot be denied that the United States has a major voice in the development of international accounting standards. As a consequence, there are enough similarities between the IASB and US based accounting standards. The adoption of IFRSs in the United States would demand a large amount of significant changes in infrastructure. Investment companies may face unique issues as there would be underlying differences in the accounting for certain holdings under the International Financial Reporting Standards. The barriers and challenges to adopt the International Accounting Standards would differ from industry to industry. Apart from that, two significant factors such as companies operating in the industry and the earlier accounting choices of the issuers may also emerge as the barrier to adopt the global standards. In the transition to the International Accounting Standards, US organisations will be required to consider the probable barrier presented by other contractual and financial requirements based on US GAAP. Dual financial reporting systems can create confusion and incorporate conflicts in the accounting and reporting activities. Other barriers to adopting the International Accounting standards are mainly related to cost and education (Please provide the citation for this information) The conversion experience in Asia, Australia and Europe reflected that the implementation process takes into account more time and resources than was anticipated (Please provide the citation for this information). The situation has led a number of companies to rush, risk mistakes or outsource more work than is necessary. This can emerge as a hindrance to attaining the required knowledge to perform day to day operations. Comparative Study of IAS and US GAAP According to US GAAP, accounting changes are defined as the changes in an accounting principle, an accounting estimation and the reporting enterprise. The correction of the error in the financial statements, issued earlier, is not deemed to be an accounting change. The US GAAP can be assumed to be more rule based standards with specific application guidance. As per the International Accounting Standards, “a change in the accounting policy is treated retrospectively by restating all prior periods presented and adjusting opening retained earning” (RBI, 2000). International Accounting standards are more principle-based standards with limited application guidance (Please provide the citation for this information) IAS 1 offers a specific framework to present the financial statement. According to the IFRS, specific line items are required to report the financial information. US GAAP introduced certain standards which require specific presentation of certain items. *Please include what these “certain items are and how they must be presented so the reader will understand* Public organisations are required to comply in line with the SEC rules and regulations, demanding specific line items (Deloitte, 2007). *Explain what specific requirements these standards demand* This standard encourages the comparative analysis of the entity’s present performance with the performances during earlier periods as well as a comparative analysis of the entity’s performance with that of its competitors. *This implies that several years must be studied, not just one. Additionally, what information is most important when looking back at previous years and how is it used to improve the organisation?* Conversely, US GAAP does not have specific requirements in regards to presenting a comparative analysis. Minimally, one year’s comparative analysis of the financial information is required. Public organisations are subject to the SEC rules and regulations, demanding two years comparative financial information for income statements, statements of shareholders’ equity and cash flows. According to the IAS, comprehensive income can be presented as one separate financial statement or may be reported in the statement of the changes in the shareholders’ equity. This is also true under US GAAP. Adding to it, the comprehensive income can be accounted and reported with the income statement. This standard permits departure from a standard when the compliance is misleading. This action is permitted in the extremely rare cases to present a fair picture with specific disclosures. However, this departure is not directly addressed under US GAAP. Despite this as per GAAP 203, the auditors may allow the companies an override if applying a certain GAAP rule seems to mislead the financial statements. IAS 1 has also offered a framework on classification of liabilities on refinancing. As per the rule, the liabilities are accounted as non-current if refinancing is completed before the balance sheet date. Under the GAAP, the liabilities are accounted as non-current if refinancing is completed before the issuance date of the financial statements. IAS has also provided a framework to classify the liabilities due on demand due to violation of debt covenant. As per the International Accounting Standards, the liabilities would be accounted as non-current if the lender has granted a 12 month waiver before the balance sheet dates. According to GAAP, the liabilities are assumed to be non-current if the lender has granted a waiver for a period greater than one year or operating cycle. The period must be before the issuance of the financial statements. While there are a number of differences in the two standards, US GAAP is generally used by US companies for financial reporting due to a tax conformity requirement as per the US Internal Revenue Code. There are even differences in the process of revenue recognition, specifically for the service contracts, multiple element arrangements, construction contracts, customer loyalty programs, real estate development and software. Generally, under the consolidation policy of International Accounting Standards, consolidation is required for all controlled entities where US GAAP does not demand encompassing of all the organisations. International Accounting Standards require the shares, which are determined to be redeemable by shareholders, to be reported as the liabilities. On the contrary, US GAAP includes those in equity (Jermakowicz & Epstein, 2008). Overall, US GAAP differs from the International Accounting Standards; however, both of them move towards the fulfilment of financial and accounting requirements of the companies in the specific regions. *How does the choice of US GAAP over IAS affect the financial performance and position of the company?* Conclusion The objectives of IASs are definitely to align fair accounting standards across the globe. The US has been a significant contributor to the framing and development of global accounting standards. As of now, there are differences among the IASs and US GAAP rules. One significant difference is that US GAAP norms are ‘rule based’ while IASs are ‘principle based’. The Security Exchange Commission has historically recognised the FASB as the authoritative body in American financial reporting. Although, since the year 2002, the FASB has collaborated with the IASB, some significant differences still remain the same (Oyedele, 2010). However, recent trends have revealed that US GAAP is leaning towards International Financial Reporting standards (Please provide the citation for this information). This has been in the wake of massive acceptance of the global standards by more than 100 countries. Undoubtedly, it would demand a number of changes in the existing accounting standards as well as the required infrastructures. At this time, a detailed revision of US GAAP is required to fulfil the financial and accounting requirements of all the stakeholders of the economic entities. References Accountinginfo. No Date. U.S. GAAP Codification of Accounting Standards. [Online]. Available at: http://accountinginfo.com/financial-accounting-standards/asc-100/105-gaap-history.htm [Accessed on December 22, 2010]. Deloitte. March, 2007. IFRSs and US GAAP. [Pdf]. Available at: http://www.iasplus.com/dttpubs/0703ifrsusgaap.pdf [Accessed on December 22, 2010]. Deloitte. 2010. Summaries of International Financial Reporting Standards. [Online]. Available at: http://www.iasplus.com/standard/ias01.htm [Accessed on December 22, 2010]. FASB. No Date. Pre-Codification Standards. [Online]. Available at: http://www.fasb.org/st/index.shtml#fas25 [Accessed on December 22, 2010]. Jermakowicz, K. E. & Epstein, J. B. December, 2008. Joining the world: US companies adopting IFRS. [Pdf]. Available at: http://www.rnco.com/pdf/Journal_International_Banking_Dec08.pdf [Accessed on December 22, 2010]. Oyedele, R. March 30, 2010. Evolution of Accounting in the United States. [Online]. Available at: http://www.suite101.com/content/evolution-of-accounting-in-the-united-states-a219943 [Accessed on December 22, 2010]. 1 Improper Citation: Improperly cited material. Please use the link below to find links to information regarding specific citation styles: http://www.plagiarism.org/plag_article_citation_styles.html This site (Suite101.com) is similar to Wikipedia and is therefore not considered and academic source as anyone can post any information whether accurate or not. RBI. 2000. Comparative Analysis Between US GAAP, Indian GAAP and IAS. [Pdf]. Available at: http://rbidocs.rbi.org.in/rdocs/publicationreport/pdfs/18354.pdf [Accessed on December 22, 2010]. Swami, A. No Date. The Changing Accounting Environment: International Accounting Standards and US implementation. [Pdf]. Available at: http://www.aabri.com/manuscripts/09206.pdf [Accessed on December 22, 2010]. Wiley. 2002. Financial Accounting and Accounting Standards. [Pdf]. Available at: http://media.wiley.com/product_data/excerpt/87/04710720/0471072087.pdf [Accessed on December 22, 2010]. Europa. No Date. International Accounting Standards (IAS). Available at: http://europa.eu/legislation_summaries/internal_market/single_market_services/financial_services_general_framework/l26040_en.htm. Greuning, V. H. & Koen, M. 2001. International accounting standards: a practical guide. World Bank Publications. Investopedia. 2010. What is the difference between IAS and GAAP? [Online]. Available at: http://www.investopedia.com/ask/answers/05/iasvsgaap.asp. Wiley. No Date. Financial Reporting and Accounting Standards. [Pdf]. Available at: http://media.wiley.com/product_data/excerpt/0X/04706163/047061630X-1.pdf . Read More