Advanced Financial Reporting and Theory - Essay Example

?Critically assess how the use of IFRSs contributes to increased transparency for stakeholders, and the extent to which IFRSs can influence economic stability. You should develop your arguments in the context of appropriate accounting theory. The international business scenarios has evolved in the last decades more than it had for many previous years. This accelerated growth is a result of advancements in information technology. There are two different aspects of information technologies which have affected the global business scenario. These technologies have made micro management of businesses very easy and secondly they have totally revolutionized communication. Systems like SAP make it possible to micro manage organizational divisions from thousands of miles away using information technology communication tools. All multinationals have adopted these systems and through these systems have been able to expand all around the globe. Moreover organizations strive to compete in international markets and adapt to changing market needs. Thus to compete with international conglomerates, local organizations have to evolve themselves according to global systems. Similar to organizations other stakeholders of financial information are also becoming global; these include financial investors, financial analyst, auditors etc. Global financial houses such as Goldman Sachs etc. have presence all around the global. Similarly companies such as Deloittes, KPMG, PWC and Ernest & Young are present in almost all countries of the world. Direct users of financial information o i.e. shareholders are also becoming more and more global. Most exchanges whether currency, stock or bond have online trading systems. These trading systems allow investors to invest anywhere around the globe. The financial troubles of the US and European economy are another factor encouraging investors to adopt global investment options in emerging markets such as China, Brazil etc. The financial crunch in the global capital markets is also forcing local regulatory bodies to adopt financial practices which would encourage more international investors to invest. The primary concern for international investors in regard to financial regulations, is the reliability of the financial information being provided. The recent financial crisis has raised many objections of financial reporting standards of financial bodies such as banks and investment houses. Therefore to attract more international investments, efforts are being made to make the local financial systems more stern and risk free. The ultimate aim of these efforts is to increase the understanding, comparability and reliability of financial information. The discussion shows that users of financial information require accounting standards which are global. As the organizations, shareholders, investors and analyst go global, the accounting standards all need to be global. The cost in translating financial statements from standard to the other is very high considering the current recession. Similarly the movement towards increased transparency requires standards which are more strict and provide greater amounts of objective information to shareholders. This is the very reasons that a global movement towards harmonization and globalization of Financial Reporting Standards has materialized. The International Financial Reporting Standards have become the global financial reporting standards and would totally overcome the Generally Accepted Accounting Principles (GAAP). The biggest advantage of IFRS thus has been the globalization of accounting standards by formulating standards which are efficient and effective in different cultural and operational environment. These standards are more transparent in their reporting requirement and encourage economic stability over a long period of time. International Financial Reporting Standards (IFRS) The IFRS are Financial Reporting Standards created by the International Accounting Standards Board. These standards are principle based standards as compared to their American Counterpart GAAP (Generally Accepted Accounting Principles). Financial Reporting is a necessity for all public limited companies. This means that all companies which hold interest (investments) from members not participating in the running of the company (registered public limited). Therefore it is important that the information being provided to the shareholders is meaningful. This is only possible if the information is presented in a manner in which all users can understand and interpret. To enable this understanding the information should be given in a format which is similar for all companies reporting because an investor does not hold investments in a single company. These standards were initially called IAS (International Accounting Standards). This was only because name of the standard setting board used to be International Accounting Standards Committee. The name of the board was changed to International Accountant Standards Board in 2001. Prior to 2001 all standards were called IAS, the new IASB is creating new standards by the title of IFRS. Pre 2001 Post 2001 International Accounting Standards (IAS) International Financial Reporting Standards (IFRS) Standing Interpretations Committee (SIC) The FASB differs in its methodology of creating accounting standards. The GAAP was created in a litigious environment, thus the methodology behind creating GAAP differs greatly from those behind creating IFRS. The GAAP are basically rules for each and every situation, because as mentioned they are a result of rulings for a very efficient legal system. This also means that they are more suited to the economic system of United States. The IFRS on the other hand provide a broader framework for financial reporting, and this is why they are called principle based reporting standards, giving general guidelines for organizations to follow in their financial reporting. In this difference lies the reason for IFRS becoming a global force as compared to GAAP. Organizations operating all around the globe can use these standards and understand them easily. Similarly regulatory bodies can easily tweak and select from a body of knowledge to find the best fit for their own separate systems and create a regulatory framework which best suits their economic need. The IFRS uses principles to bring about economic stability by ensuring that there is adequate disclosure of corporate performance in Financial Statements. The IFRS ensure that the following four characteristics are upheld: I. Understanding: The standards ensure that all visual depictions of information is similar to increase understanding of financial information. The names of accounts and the treatment of each accounting items are done according to a similar procedure. Thus stability in reporting can be achieved by increasing understanding of information over a board of different category of users. II. Reliability: The reliability of financial reporting has come under a lot of scrutiny since the economic meltdown of 2008. Questions have been raised on the credibility of the information being provided to users of financial statements. IFRS has improved overall financial reporting standards to ensure that reliability leading to transparency is maintained in reporting. The standards ensure that organizations cannot find ways to circumvent the standards and hide the real picture from the public. In financial terms giving an incorrect picture of company performance while remaining in legal boundaries is called window dressing. The Financial crisis of 2008 was partially induced because banks and other corporations were engaging in window dressing of their results. Thus it is important that standards find ways to eliminate all opportunities for window dressing and bring about transparency. This has lead towards the fair value accounting movement. The need of the time is to adopt methods of reporting assets and other accounts at their useful (fair-value) rather than historical value. This would ensure that there are less opportunities to window dress. IFRS has integrated many aspects of fair value accounting to increase its transparency. III. Relevance: The information should be relevant to the needs of the users. This means that information should be concise, so that the users do not have to dig through tons of data to get through to the useful information. This ensures that resources are not wasted in interpreting the information given by organizations. IV. Comparability: The comparability of the financial reporting standards has taken a whole new meaning after the movement to globalize reporting standards. The classical meaning of comparability asks for financial information to comparable between different organizations so that financial information users can interpret results. However the globalization of economic systems requires that there should be comparability amongst organizations operating in different parts of the world. This is why a global accounting standard are being chosen. Increased Transparency The IFRS aims to increase financial reporting transparency as has been discussed above. Many different clauses have been added and other tweaked to improve ability of standards to make information more reliable. A major part to this is encouraging management by intent. This means that intentions of the management are more important rather than adherence to rules and guidelines. Therefore in-order to understand how IFRS encourages transparency we will have to review its ability to improve Clarity, Comparability and Understandability. If we look at comparability IFRS does increase comparability by giving broader principles and providing one general guideline for reporting. However there are issues which still restrict the ability to be comparable e.g. management has the attempt to use fair value options for assets and liabilities. Moreover there is choice for reappraisal or cost basis for PP&E (Property Plant and Equipment) accounts. Thus when there is choice for management to choose from different methods to record assets and liabilities it would affect comparability of the standard. One of the issues still available in clarity is no separate distinction for unrealized and realized holding gains. Thus clarity of income would be substantially compromised. Despite this issue, clarity has increased in other aspects of information, especially since the standards have become simpler as compared to earlier. The Understandability of reporting has increased mostly due to uniformity of standards. Moreover IFRS has a smaller standard code thus there are less standards which cover more areas thus making it more untestable to organizations implementing the system. However in regard to transparency the advantages of IFRS are far greater than any previous systems. Therefore it can be said that IFRS would bring more transparency to financial reporting standards. Conclusion Economic stability is dependent on stability and consistency of organizations. This economic stability is dependent on the security on the financial entities. The new IFRS has ensured that there is a tighter and more practical approach towards financial reporting. The wellbeing of the investors leads to stability in the markets. This is because the whole financial system is based on a sense of trust. The dormant shareholder is not active in the operations of an organization. Similarly a depositor does not actively participate in the running of a banks or personally analyse who the bank gives their money to as loans. To ensure that trust is maintained; investors, depositors and shareholders should be able to rely on the financial information being provided. The discussion has shown that IFRS strives to improve the transparency of financial information. This transparency ensures users of financial information can rely more on the information being provided. This debate of financial reporting’s relationship with economic stability is instigated by the recent economic crisis. The reason behind this relationship is the failure of reporting standards being used in United States to report transparently the financial situation of companies. This led to reduced trust by the shareholder in their organizations leading to collapse of the stock markets. Similarly the banks were not able to correctly present their financial situations leading to a Contagion effect and reduced confidence of depositors. Thus the inherent problems with reporting mechanism led to reduced confidence and inevitable economic stability. IFRS principles are rigid when it comes to reporting and thus provide little room for window dressing. In the long run these standards would reduce chances of deceiving investors and shareholders. This would increase their confidence and result in longer periods of economic stability. Moreover uniformity in reporting standards would result in less ambiguity when reporting multinational reports and therefore more stability, from trust of international investors. References New IFRS to increase financial reporting transparency, Risk Management Review. Available at (http://www.riskmagazine.com.au/article/new-ifrs-to-increase-financial-reporting-transparency-116387.aspx) Ber, J. (2006.) The Quest for Transparency in Financial Reporting: Should International Financial Reporting Standards Replace U.S. GAAP? Hickley, A, (2011), Is transparency more important than IFRS convergence?, GFS NEW Arthur, P., Martin, P. 2002. 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