Accounting Regulation is at Crossroads - Essay Example

? Accounting Regulation is at Crossroads Introduction In the recent past, there have been alterations in accounting regulations, as a result, of development of International Financial Reporting Standards. In September 2002, FASB and IASB agreed to work collectively, in consultation with other regional and national agencies, to remove the disparities between U.S. GAAP and worldwide standards (IASB 2013, p. 1). Although, most countries around the globe adopted GAAPs as part of their accounting regulations, there were differences on disclosure framework pertaining to certain accounting items. As a result, corporations with global operations experienced problems in consolidating their financial statements (McEwen 2009, p. 109). Also, companies operating in a certain country experienced difficulties while comparing their financial performance with foreign companies in the same industry. Consequently, users, preparers and regulators of financial reports recognized the need to develop a universal accounting regulation, which will ensure a universal disclosure framework (McEwen 2009, p. 110). This paper seeks to examine whether we require a universal recognized disclosure framework, which will offer guidance to preparers and regulators towards superior material disclosure. Disclosure Framework Full revelation principle is relevant to the concept of materiality. This principle necessitates that the entire material information has to be revealed in financial declarations either on the face of monetary reports or in the notes of monetary declarations (Bellandi 2012, p. 4). On January 2013, IASB (International Accounting Standards Board) released some of the outcomes of an investigation carried out lately on monetary information disclosures. Respondents to the survey recognized various aspects, which contribute to the problem of disclosure. The IASB received responses from 225 respondents across North America, Asia and Africa. Approximately 20 per cent of these responses came from users of monetary reports and approximately 50 per cent came from preparers (IASB 2013). The following are the survey highlights; first, more than 80 per cent of respondents settled that enhancements can be made to the manner financial information is revealed. Forty percent of these respondents considered that such enhancements were needed across all components of yearly reports and not only monetary statements. Most preparers of monetary statements recognized the primary difficulty as disclosure obligations being too broad with slight effort of excluding irrelevant information. Immaterial information has been referred to as revelation overload (IASB 2013, p. 3). Numerous users of monetary statements considered that preparers need to enhance the communication of relevant details within the monetary statements, instead of leaving users to sieve through enormous amounts of information. The survey identified a variety of views on the fundamental causes of the difficulty. Some respondents recognized the need to enhance the manner in which bookkeeping principles are set out (Virginia Society of Certified Public Accountants 2013, p. 3). Backhaus (2013, p. 2) notes that, other respondents articulated concerns that regulators, preparers and auditors are approaching monetary exposure as an exercise in compliance instead of as a way of communication. As the chairman of IASB, Hans Hoogervorst noted, the feedback demonstrated a need for auditors, standard setters, investors, preparers, and regulators to work collectively in order to deliver the needed enhancements to all disclosures. In January 2013, Financial Reporting Council of United Kingdom initiated consultations among regulators, preparers and users of monetary reports regarding disclosures. The topic of discussion was about thinking about revelations in an extensive context. In its contribution to this discussion, Grant Thornton agreed that there is an apparent need for a revelation framework to help the IASB and other agencies that disseminate corporate exposure regulations, to permit them to make coordinated and better informed resolutions when stipulating requirements. The firm believed that the final result of the discussion ought to be a yearly report, which concisely and clearly explains the performance, development and position of the business (Cardiff 2013, p. 2). The firm agrees with Financial Reporting Council that the issue is about both quality and quantity of disclosures. The firm believes that the two fundamental issues that revelation framework requires to tackle are the lack of lucidity of communication in the yearly monetary report, and complexity in applying materiality to revelations. There is the believe that the discussion will strengthen the requirement in Presentation of Financial Statements (paragraph 31 of IAS 1) that revelations are required just for material items. The firm believes that a mixture of factors has resulted to the significance of materiality regarding revelations being lost by preparers, and administration having less confident in making decisions in this area (Cardiff 2013, p. 3). As Cardiff (2013, p. 2) notes, the firm agrees that materiality concept is complex to apply when deeming disclosures. The firm hopes that its contributions and the discussion will assist in the development of constructive guidance. The firm believes that the debate will also tackle the problem of lack of lucidity in the annual monetary report since this contributes to low quality revelations. A disclosure structure should promote the provision of a statement, which will remove replication and promote cohesiveness. The firm’s opinion is that, the annual monetary report should contain only details for the known user. On the same discussion PKF, Accountants and Business Advisers acknowledged that there are disclosure problems and these problems can only be solved by all relevant preparers, users, regulators and auditors working collectively. Contemplation of placement criteria can assist the IASB and other accounting standards setters in defining what details ought to be mandated in the notes of the monetary statements. The significance of avoiding replication within the yearly report can also promote suppleness in the drafting of principle revelation obligations. IFRS 7 clearly allows the presentation of certain revelations by cross-reference to another report, which is accessible to users on the similar terms and at the similar time as the monetary declarations (Appleton 2013, p. 2). Users of financial statements include investors, regulators, preparers, creditors, employees, and members of the public amid others. However, prime users of monetary statements are investors. These users require different information from the financial statements; therefore, it is imperative to consider different information requirements among users while developing revelation framework. Lack of cohesiveness in the annual monetary reports often leads to lack of comprehension of these reports by the users. The existence of isolated components frequently leads to duplication of information in diverse components of the monetary declarations, or even presentation of inconsistent details, which can be perplexing to users. Lack of lucidity emanates from various competing regulatory obligations, which have regularly led to details being presented in discrete parts of the monetary report (Bellandi 2012, p. 8). On February 2013, EFRAG (European Financial Reporting Advisory Group) initiated a discussion among preparers, regulators and users of monetary reports regarding revelations. The topic of debate was Discussion Paper Towards a Revelation Structure for the Notes (EFRAG 2012, p. 2). In its contribution ASBJ (Accounting Standards Board of Japan) supports the development of a revelation structure, and shares the EFRAG’s opinion that the mounting volume of the note exposures results to low quality of details. This board believes that standard setting on the basis of a suitable disclosure structure would improve the users’ capability to search and comprehend relevant details (ASBJ 2013, p. 1). The Discussion Paper suggests establishing the scope of the notes to monetary declarations on the basis of users’ requirements. The board proposes determining the scope on the basis of the timing of fundamental events and transactions and descriptions of the entire depiction in IASB Conceptual Framework (paragraph QC13). The board believes that developing regulation for applying materiality would assist enhance the existing practice. However, the board suggests further deliberation to develop practical guidance, comprising quantitative and qualitative examples (ASBJ 2013, p. 3). Conclusion The paper has demonstrated that there is a disclosure problem in financial reporting especially in regard to materiality of monetary reports. Users, auditors, preparers, standard setters and regulators acknowledge the need for improvement of disclosure framework. The feedback from a survey conducted by IASB demonstrated the need for auditors, regulators, standard setters, users and preparers to work jointly in order to bring the required enhancements to all disclosures. Materiality, disclosure overload and lack of clarity are some of the aspects that are creating disclosure problem. The paper has established that there is a necessity to prepare a disclosure framework that will suit different needs of financial statements users. There is also a need for regulators, preparers and auditors to use financial reports as a way of communication rather than an exercise of complying with reporting standards. References List Accounting Standards Board of Japan (ASBJ) (2013). Comment on Discussion Paper Towards a Disclosure Framework for the Notes, Tokyo, Accounting Standards Board of Japan. Pp. 1-3. Appleton, A. (2013). Discussion Paper: Thinking about Disclosure in a Broader Context, London, PKF (UK) LLP. pp.1-2. Backhaus, D. (2013). IASB Survey on Financial Disclosure Leads to Blame Game, London, CFO Insight. Pp.1-6. Bellandi, F. (2012). The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting, London, John Wiley & Sons. Pp.4-8. Cardiff, M. (2013). Thinking about Disclosure in a Broader Context, London, Grant Thornton UK LLP. Pp. 2-3. European Financial Reporting Advisory Group (EFRAG) (2012). Towards a Disclosure Framework for the Notes, Discussion Paper, Brussels, European Financial Reporting Advisory Group. Pp.2-5 International Accounting Standards Board (IASB) (2013). Convergence between IFRSs and US GAAP (Online). Accessed March 22, 2013. Available at: http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Pages/Convergence-with-US-GAAP.aspx International Accounting Standards Board (IASB) (2013). Joint Effort Needed to Tackle Disclosure Problem, London, IFRS Foundation and the IASB. Pp. 1-3. McEwen, R. A. (2009). Transparency in Financial Reporting: A Concise Comparison of IFRS and US GAAP, Hampshire, Harriman House Limited. Pp. 109-110. Virginia Society of Certified Public Accountants, 2013, IASB Survey Details ‘Disclosure Overload’, Baltimore, Virginia Society of Certified Public Accountants. Pp. 1-3. Read More