The International Accounting Standards Board (IASB) - The International Corporate Reporting Issues - Assignment Example

International Corporate Reporting Issues Accounting Conceptual Framework The International Accounting Standards Board (IASB) develops and issues the International Accounting Standards (IAS), which are also known as International Financial Reporting Standards (IFRS). The International Accounting Standards Committee (IASC) was replaced by the IASB in 2000 (IAS Plus, n.d.). Wood and Sangster (2008) highlights that the IASC was initially founded by an Accountant’s International Study Group particularly in 1973. The IASB is an international but independent accounting setting body. Soon after becoming the international accounting standards setting body, the members of IASB finalized and decided to discuss, develop, in the global public interest, a single set of high quality international accounting standards. (About Us, n.d.). However, as IASB is UK-based and its standards are mostly applied to the UK based corporations, the U.S. corporations follow the accounting standards by the Financial Accounting Standards Board (FASB). The globalization and increase in cross border transactions necessited both boards to work closely and issue collective international accounting standards. This process begins the convergence between the IASB and the FASB particularly in 2002 Norfolk agreement, where both regulatory bodies developed a consensus to develop and issues a set of high quality compatible standards (Carmona and Trombetta, 2010). However, there exist various challenges that make it substantially difficult for the both bodies to ensure the global but uniform application of the international accounting standards. The global application and acceptance of international accounting standards and frameworks have been unable to establish their global recognition and acceptance. Furthermore, a considerable number of critics argue that a single international accounting body may not be in favour of stakeholders rather it may generate additional problems for them (Lont, 2010). The rationale for this argument is that the international accounting standards of IASB are not compulsory or obligatory on the corporations instead they are voluntary in nature. Within the same context, they also contend that the IASB finds no legal power or authority to implement these accounting standards. Since the IASB possesses no legal backing to implement its own developed international accounting standards, it would be substantially difficult for the IASB to ensure and monitor the global recognition and uniform application of the IFRS. Ironically, soon after the establishment of the IASC in the United Kingdom, the foundation of the FASB took place in the U.S. it would not be incorrect to say that the creation of the FASB was a counter measure to the existence and function of the IASC. Moreover, in the same year 1973, the FASB developed and drafted its own accounting standards and issued within the United States. Consistently, the FASB has been developing the Generally Accepted Accounting Practices (GAAP) as a counter measures for the IASs being produced by the IASB till the year of 2002. Furthermore, the FASB works as a competitor to the IASB. Both have agreed to the IFRS would be implemented in the United States of America by the end of 2015. This is an endeavour to introduce the global uniform application and practice of the IFRS and this would bring a forward step toward the attainment of the global application and practice of the international accounting frameworks and standards. However, this global and uniform application received a severe blow when the FASB independently and separately outlined, developed and published its own vision on how to carry out the process of reforms in the accounting of financial instruments (Veron, 2010). Also, the IASC Foundation has been widely criticized on its approach towards entertaining its mission. In this regard, the European banking sector highlights its reservations over the certain announcements of the IASC. Consequently, it has heightened hostitlity between the two; the hostility becomes more harsh when the Chairman, Gerrit Zalm, of the IASC Foundation trustees has been serving as a full time banker since 2008 (Veron, 2010). This situation represents the presence of conflict of interest. However, certain authors have commended the IASB role and its efforts towards uniform and global development and application of accounting frameworks and standards. Without any doubt, the IASB has been successful by partially entertaining the global mission objectives. Till this point of time, the existence challenges such as convergence with the U.S. GAAP, developing and implementing agreed global consensus on the application of the IFRS, the main funding issues of the Board, are those fundamental challenges that are yet to be appropriately addressed by the IASB. Diageo Plc. Introduction Diageo as a company is still relatively a new company and serving from 1997. However, the history of brands is considerably historical. For example, the earliest ancestor company came into existence in 1749, known as Justerini & Brooks-wine merchants and blenders of the famous J&B whisky range. Subsequent to that, after 10 years, in 1759 Aruther Guinness concluded a lease on the now world popular St James’s Gate brewery in Dublin. Diageo is one of the pioneering premium drinks company with a remarkable collection of beverage alcohol brands across wine, spirits and beer. These popular brands encompass Crown Royal, Johnnie Walker, Smirnoff, Buchanan’s Bushmills whiskies, J&B, Windsor, Captain Morgan, Ciroc and Ketel One Vodkas, Jose, Cuervo, Guinness and Tanqueray. A considerable number of brands have been availed by the many generations, while some have been launched recently to fulfill the new tastes and experiences of the existing and potential customers of the company. Diageo has been trading almost 180 markets across the globe and has employed more than 20,000 employees. The company has established its office in 80 countries along with the production facilities across the globe including, Canada, Great Britain, Spain, Ireland, United States, Africa, Italy, Australia, Latin America, Caribbean and India. The company is listed on both the New York stock Exchange (DEO) and the London Stock Exchange (DGE). Information significant for Diageo’s Investors The investors always take into account certain features before going to invest any potential company. They would be interested to see the finanical performance and financial stability of the company. By taking into account such factors, the investors would be able to get appropriate level of information enabling them to take lucrative financial and economic decisions. The finanical information would enable the investors to avoid any future loss that could take place and sink their investment. Such type of examination or contemplation has become more significant particularly after the events of global financial crisis back in 2008, in which millions of dollars were sunk and many investors committed suicide as they were unable to face the repercussions of the effects of the global finanical crisis. Due to such reasons, the investors are still wary and considerably critical before going to make any investment decisions. The investors would be interested to evaluate the financial performance of the Diageo Plc. by taking into account the measures such as annual sales, gross, operating profit, net profit, and share price movements, earnings per share (EPS), dividend and dividend per share. The single measure would not be sufficient. As a result, it would require them to compare either with the previous years, with the industry averages or with the competitors measures. The Diageo Plc. generates 12,283, 12,958, and 13,232 ? million in 2009, 2010, and 2011 respectively. In 2010, 5.49 %, in 2011 2.11 % increase has been observed in the annual sales of the company. This shows that the company has declined its annual sales in the year of 2011 in comparison with the 2010. Although some authors may contend that the company may be experiencing the impacts of the global finanical crisis in 2011, however many businesses are stabiling and booming as well. Aggreagetely, the company has diminished its annual sales. In 2010 4.85%, and in 2011 4.31% gross profit has also been declining. This highlights that the impacts of the decline in sales figures also affecting the gross profit figure of the company. The operating profit has increased in 2010 by 6.45% in comparison with the 2009 operating profit figure. On the other hand, in 2011 operating profit has declined to 0.81 percent in comparison with the 2010 figures. The major reasons include increase in marketing; other operating expenses have increased this gap. The net profit has increased around 2.16% in 2010 in comparison with the net profit of 2009. In comparison with the 2010 net profit, the company has generated more net profit in 2011 around 15.72 %. The major reasons include reduced taxation charges, finanical charges and the increased share of associate’s profit after tax. Moreover, investors also prefer to see trends in the earnings per share particularly in the diluted earnings. The Diageo has issued earnings per share 64.6p, 65.5p and 76.2p per share in 2009, 2010 and 2011 respectively. This highlights that the company was unable to extend more earnings per share in 2010. However in 2011, the company extended more than 10p in that year in comparison with the previous year. In 2009, 2010 and 2011, the company paid 870, 914, and 973? million respectively. The aggregate trend in the dividend highlights that the company has been increasing its dividends appropriately in order to meet with the investors and shareholders expectations. Information significant for Diageo’s Lenders The lenders include finanical institutions such as investment banks, commerical banks, building societies and credit unions and so on. The 2008 financial crisis has also severely affected various investment banks and many banks sank, others declared bankruptcy and some defaulted. The debacle of Lehman Brothers has convinced many lending institutions to remain highly careful before extending loaning facility to any institutions. Similar to investors, the lenders are also interested to know the financial performance, financial position of the potential client; they would be interested to know about total assets, liabilities, sales trends, aggregate business performance. The company has fixed assets 12,502 and 12,616 ? million in 2010 and 2011 respectively. This shows that only 0.91 % fixed assets were increased from 2010 to 2011. Among them, the major contribution is provided by intangible assets, the property, plant and equipment and investments in associates. Among all of the fixed assets, the highest contribution is provided by the intangible assets. The biggest drawback of this aspect is that the company has lesser tangible assets and more intangibles. And the biggest problem of this kind of measurement is that considerable number of intangible assets are subjectively measured and accounted for in the finanical statements even if they may not be representing their actual market value. The total assets of the company are 19,454 and 19,777 ? million in 2010 and 2011 respectively. And the total current assets are 6,952 and 7161 ? million in 2010 and 2011 respectively. In addition to that, the company’s non-current liabilities are 10,724 and 8,877 ? million in 2010 and 2011 respectively. From 2010 to 2011, the total reduction in the non-current liabilities is 17.22 percent. However, for lenders ssuch reduction would not be a convincing attempt as they could see that the company is considerably under the sword of debt. Its total borrowings are 8,177 and 6,748 ? million in 2010 and 2011 respectively. Although the level of borrowings has diminished however lenders would find it difficult to extend the credit or loaning facility to the company. The major reasons would be that the Diageo is already under a substantial debt; its non-current liabilities are comparatively substantial. In addition to that, the company has maintained substantial levels of intangibal assets, which may not be sufficient for any potential lenders to extend the credit facility. Moreover, the company is not appropriately maintaining the required level of equity or share capital to fund its business needs. This fact is crystal clear and supported by the higher level of borrowings. However, the business performance is not as satisfactory as required. The annual sales from 2009 to 2011 have not been increased as it should be. A mere growth of 5.49 % in 2010 and 2.11 % in 2010 increase cannot be termed as growing and attractive sales figures. The closer analysis suggests that the company has declined its sales figures in 2011 in comparison with the previous year. And, in the above mentioned investor segment, it has been made clear that the gross profit, operating profit of the company are diminishing instead of increasing during these years. This concludes that the Diageo may not be able to receive any loan facility from the finanical institutions as its business performance and finanical performance are not satisfactory. Three Areas and Application of International Accounting Standards Area one with disclosure notes information Intangible Assets International Accounting Standards (IAS 38) Intangible Assets is used to prescribe treatment for intangible assets that are accounted for or described specifically by the other accounting standards. IASC defines “an intangible asset is an identifiable non-monetary asset without physical substance.” (IASC, n.d.). And the recognition requirements necessitate that before going to account for an intangible asset, an entity is required to establish that the item meets either of the following: (a) the definition of an intangible assets; (b) the recognition criteria. An asset meets the criterion pertaining to identifiability in the definition of an intangible asset when the asset is separable or is capable of being divided from the entity and sold, rented, licensed, transferred, or exchanged, either collectively or individually with a related contract, liability or asset or arises from other legal rights or contractual rights, regardless of whether those rights are separable from the entity. Critical Evaluation of area one The company has considerably employed subjectivity. This can be authenticated by the fact that the Diageo has developed more tangible assets than other non-current assets. And this factor can be served a less positive as the company may not be able to convince its existing investors and potential lenders due to the fact that the subjective measures have been used to employ the develop the intangible assets of the company. In notes of the finanical statements, it is mentioend that company used impairment loss and amortisation in order to adjust the value of the intangible assets. Moreover, it is mentioned that the intangible assets have been impaired along with exceptional impairment. Area two with disclosure notes information Property Plant and Equipment IAS 16 Property, Plant and Equipment are used to account for accounting related transactions of property, plant and equipment. Property, plant and equipment items have been identified as tangible that (a) are held for the purpose of production or supply of goods or services, or for administrative purposes, or for rental purposes; and (b) these tangible assets are expected to have durable life containing more than one year period (Techanical Summary, 2011). In addition to that, the cost of an item of property, plant and equipment shall only be recognised as an asset if: (a) it is probable that future economic benefits attached with the item will head toward the entity , and (b) the cost of that item can be calculable satisfactorily. The cost of an item of property,plant and equipment encompass: (a) its purchase price, encompassing non-refundable purchase taxes, import duties, after deducing rebates and trade discounts (b) any costs directly attaached to bringning the asset to the condition and location essential for it to be capable of operating in the manner necessitated by the related management, (c) the initial estimation of the costs of removing and dismantling the item and restoring the site on which it is located and the obligation for which an entity incurs either when the item is obtained . Critical Evaluation of area two In the notes, it is mentioned that the company has land and buildings, plant and equipment, fixtures and fittings, returnable bottles and crates, and certain under construction projects under the label of property plant and equipment. However, there is biggest challenge with this accounting standards and its application is that the companies are at will to choose their own favourable manner to depreictae their assets. This enables to select such depreciation method that extends most benefit to them. Area three with disclosure notes information Taxation IAS 12 income taxes are employed to appropriately understand the tax related treatment and its practice. It is developed and provided by the International Accounting Standards Board. The IAS 12 requires that an entity to measure the deferrred tax pertaining to an asset relying on whether the entity desires to recover the carrying amount of the asset by using or selling. The biggest challenge with this kind of financial arrangement is that it can be difficult and subjective assess whether recovery will be through sale or through use when the asset is measured employing the fair value model in IAS 40 Investment Property. The amendment extends a practical remedy to the problem by introducing a presumption that recovery of the carrying amount will be through sale or normally be (Press Release, 2010). Critical Evaluation of area three The taxation has been very challenging aspect for the entities as it entails pretty complex accounting measures and policies. The fundamental challenge with this aspect is that it uses the concept of deferred taxes in which temoprary differences and unrecongised tax losses are taken into account. In the notes, it is mentioned that the Diageo company’s current tax in 2009, 2010 and 2011 is 400, 354 and 450 ? million respectively. This means that the company has paid more tax in 2011 than the previous years. Subsequent to that, it is mentioned that the company has received benefits of previously unrecognized tax losses in 2009 and it is followed by the adjustments in respect of prior years. Reference 1. “About Us”. International Financial Reporting Standards (IFRS). [Available at : http://www.ifrs.org/The+organisation/IASCF+and+IASB.htm ] [Accessed: 6 May, 2012]. 2. Carmona, S. and Trombetta, M. (2010). The IASB and FASB Convergence process and the need for ‘concept-based’ accounting teaching. Advances in Accounting, Incorporating Advances in International Accounting 26, 1-5 3. Veron, N (2010). ‘IASB in a bind’, [Available at: http://veron.typepad.com/files/financialworld_may10.pdf ] [Accessed: 07 May, 2012] 4. Lont, D. (2010).”Issues in financial accounting and reporting: a Pacific Rim focus”, Pacific Accounting Review: Vol: 22 iss: 2. [Available at: http://www.emeraldinsight.com/journals.htm?issn=0114-0582&volume=22&issue=2&articleid=1881948&show=html] [Accessed: 6 May, 2012]. 5. Wood, F., & Sangster, A. (Eds.). (2008). Business accounting. Delhi: India. Person Education South Asia Read More