The adoption of International accounting standards - Assignment Example

The adoption of International Accounting Standards (IAS) Implementation of IAS is strategicin nature providing long-term security to firms despite short term expenses. The law requires firms to take concrete steps to ensure employee capacity building, asset and liability management, evaluation of financial instrument and more visibility of financial statements. Although it costs firms initially, it saves firms from surprises and protects investors who may also be employees as stakeholders. More specifically IAS 19 deals with employee benefits and IAS 39 deals with financial instruments.

It requires companies to treat employee share options as wages expense .In simple terms it means save as you earn. As per Barclays bank, after implementation of IAS laws, increase in net profit is minimal, that is increase of $125 Million against profit of $ 8.8 Billion (Jane). With respect to employees, the IAS stock options have mixed response. Since employee stock options are used as part of compensation package, if an employee leaves the firm before a particular date “vest date” benefit for that year goes to firm and not the employee.

An option is considered exercised when the option holder buys the shares at the exercise price. As far as net income of company after implementing IAS laws is concerned, most of companies use Intrinsic Value method instead of treating fair market value of employee stock option as compensation package. This method recognizes as compensation expense only the amount in excess of market price, over the exercise price, on the grant date. Most high tech companies argue that recording employee stock options as a compensation expense would lower their reported earnings and will put them on negative side to raise capital.

Impact of this law on smaller company profit is significantly negative, that use stock options to attract employees at lower salaries. In the end IAS laws have given a chance to companies to show inflated profit and inflated bottom line by manipulating stocks. As per Professor Robert of Trinity University (Robert), when Dot Com bubble burst in year 2000, many high tech firms had to issue accounting re-statements well into next decade. Due to investment in stocks, firms wrongly take over inflated stock options as their net wealth which is wrong.

In this way most high tech companies like Intel and Cisco have to re adjust capital values and borrowing. Ultimately these companies have to lay off employees in order to maintain existence and avoid total collapse. A good example of collapse due to inflated value is Enron. Another example of inflated value is Widget Techs. General Electric Co is also criticized on giving inflated 2 Million stock options to CEO. Generally stock options have rewarded employees in IT industry. Financial services companies and insurance sector is hit hard by IAS laws since it will distort their earnings.

This sector is likely to decrease options of employee shares. Another sector affected is commodity market like Oil and Gas since the price changes are volatile. It is worth noting that effect of IAS laws on profits and assets is not same for all companies. Few companies like ICI and Tesco have experienced profit increase while others like Royal and Sun alliance of UK has reported considerable loss. Works Cited Jane Croft. “Barclays analyses effect of IAS rules’ 7 December 2004 .Web. 21 July 2011 Robert.

“Cooking the Books Why do firms issue financial misstatements?”trinity.edu.February 2011. Web. 21 July 2011. http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm